Office of the Comptroller of the Currency
J une 2001
Comptroller
John D. Hawke Jr.
Executive Committee
First Senior Deputy Comptroller and Chief Counsel.
Chief of Staff.
Senior Deputy Comptroller for Management and Chief Financial Officer.
Senior Deputy Comptroller for Bank Supervision Operations.
Senior Deputy Comptroller for Bank Supervision Policy.
Senior Deputy Comptroller for International and Economic Affairs.
Senior Deputy Comptroller for Public Affairs (Acting).
Chief Information Officer.
Ombudsman.
Background
The Office of the Comptroller of the Currency (OCC) was es¬
tablished in 1863 as a bureau of the Department of the Trea¬
sury. The OCC is headed by the Comptroller, who is appointed
by the President, with the advice and consent of the Senate,
for a five-year term.
The OCC regulates national banks by its power to:
• Examine the banks;
• Approve or deny applications for new charters,
branches, capital, or other changes in corporate or
banking structure;
• Take supervisory actions against banks that do not
conform to laws and regulations or that otherwise
engage in unsound banking practices, including re¬
moval of officers, negotiation of agreements to
change existing banking practices, and issuance of
cease and desist orders; and
• Issue rules and regulations concerning banking prac¬
tices and governing bank lending and investment
practices and corporate structure.
The OCC divides the United States into six geographical dis¬
tricts, with each headed by a deputy comptroller.
The OCC is funded through assessments on the assets of
national banks, and federal branches and agencies. Under the
International Banking Act of 1978, the OCC regulates federal
branches and agencies of foreign banks in the United States.
The Comptroller
Comptroller John D. Hawke Jr. has held office as the 28th
Comptroller of the Currency since December 8, 1998, after
.Julie L. Williams
.Mark A. Nishan
.... Edward J. Hanley
.Leann G. Britton
Emory Wayne Rushton
. .Jonathan L. Fiechter
.Mark A. Nishan
.Steven M. Yohai
.... Samuel P. Golden
being appointed by President Clinton during a congressional
recess. He was confirmed subsequently by the United States
Senate for a five-year term starting on October 13, 1999. Prior
to his appointment Mr. Hawke served for 3V2 years as Under
Secretary of the Treasury for Domestic Finance. He oversaw
development of policy and legislation on financial institutions,
debt management, and capital markets; served as chairman of
the Advanced Counterfeit Deterrence Steering Committee; and
was a member of the board of the Securities Investor Protec¬
tion Corporation. Before joining Treasury, he was a senior part¬
ner at the Washington, D.C. law firm of Arnold & Porter, which
he joined as an associate in 1962. In 1975 he left to serve as
general counsel to the Board of Governors of the Federal Re¬
serve System, returning in 1978. At Arnold & Porter he headed
the financial institutions practice. From 1987 to 1995 he was
chairman of the firm.
Mr. Hawke has written extensively on the regulation of financial
institutions, including Commentaries on Banking Regulation,
published in 1985. From 1970 to 1987 he taught courses on
federal regulation of banking at Georgetown University Law
Center. He has also taught courses on bank acquisitions and
serves as chairman of the Board of Advisors of the Morin
Center for Banking Law Studies. In 1987 Mr. Hawke served on
a committee of inquiry appointed by the Chicago Mercantile
Exchange to study the role of futures markets in the October
1987 stock market crash. He was a founding member of the
Shadow Financial Regulatory Committee, and served on it un¬
til joining Treasury.
Mr. Hawke was graduated from Yale University in 1954 with
a B.A. in English. From 1955 to 1957 he served on active
duty with the U.S. Air Force. After graduating in 1960 from
Columbia University School of Law, where he was editor-in-
chief of the Columbia Law Review, Mr. Hawke clerked for
Judge E. Barrett Prettyman on the U.S. Court of Appeals for
the District of Columbia Circuit. From 1961 to 1962 he was
counsel to the Select Subcommittee on Education, U.S. House
of Representatives.
The Quarterly Journal is the journal of record for the most significant actions and policies of the Office of the Comptroller of the Currency. It is
published four times a year. The Quarterly Journal includes policy statements, decisions on banking structure, selected speeches and congressional
testimony, material released in the interpretive letters series, statistical data, and other information of interest to the administration of national banks.
Send suggestions or questions to Rebecca Miller, Senior Writer-Editor, Communications Division, Comptroller of the Currency, Washington, DC
20219. Subscriptions are available for $100 a year by writing to Publications—GJ, Comptroller of the Currency, P.O. Box 70004, Chicago, IL
60673-0004. The Quarterly Journal is on the Web at http://www.occ.treas.gov/qj/qj.htm.
Quarterly J ournal
Office of the
Comptroller of the Currency
J ohn D. Hawke J r.
Comptroller of the Currency
The Administrator of National Banks
Volume 20, Number 2
J une 2001
Contents
Page
Condition and Performance of Commercial Banks.
Recent Corporate Decisions.~21~
Speeches and Congressional Testimony. 23
Interpretations—January 1 to March 31, 2001 .~53
Mergers—January 1 to March 31, 2001. 69
Tables on the Financial Performance of National Banks. 89
ihief Financial Officer’s Annual Report—2000. 105
llndex.
32D
Quarterly J ournal, Vol. 20, No. 2, J une 2001 iii
Condition and Performance of Commercial Banks
Summary of Condition and
Performance
The banking industry had record net profits of $19.8 bil¬
lion in the first quarter of 2001, surpassing the previous
high set in the first quarter of last year, as shown in Table
1. Return on equity was below year ago levels but im¬
proved compared to the fourth quarter 2000 and re¬
mained quite robust by historical standards. However,
much of the gain came from sources that are unlikely to
be recurring. In core areas the earnings environment has
deteriorated. Growth in net interest income was weak and
more than offset by increases in provisioning as asset
quality slipped. In addition, the pace of expansion in non¬
interest income, which had been a primary factor in im¬
proving bank earnings in the late 1990s, slowed sharply.
Despite these negative trends, the overall banking system
has benefited from several years of exceptionally vigorous
performance and remains quite strong, with 98 percent of
banks well capitalized.
There was a noticeable distinction in performance among
banks by size. Smaller institutions generally experienced
a sharper decline in return on equity than their larger
competitors. For example, national banks with less than
$100 million in assets on average saw a 300 basis points
decline in return on equity over the year. In another indi¬
cation of the squeeze on smaller banks, less than half of
commercial banks below $100 in asset size experienced
an increase in net income compared to the first quarter
2000. Banks in all other size classes on average reported
gains.
Table 1—Summary of quarterly data for
commercial and national banks, 2000 and 2001
All commercial banks
(Quarterly data)
1st quarter 2000
1st quarter 2001
Net Income
$19.5 billion
$19.8 billion
ROA
1.35%
1.27%
ROE
16.05%
14.78%
Noncurrent C&l loans ratio
1.28%
1.82%
Equity capital to assets
8.41%
8.66%
Banks well capitalized
97.6%
97.7%
All national banks
(Quarterly data)
1st quarter 2000
1st quarter 2001
Net Income
$11.5 billion
$11.4 billion
ROA
1.41%
1.33%
ROE
16.55%
15.16%
Noncurrent C&l loans ratio
1.23%
1.88%
Equity capital to assets
8.52%
8.90%
Banks well capitalized
98.1%
98.2%
Banking industry assets grew by about 8 percent in the
last year even as the industry continued to consolidate.
The total number of FDIC-insured commercial banks
dropped by 279, to 8,237. There was a decline of 126 in
the number of national banks, to 2,201, in the year.
Key Trends
One of the principal factors behind the rise in earnings in
the first quarter was nonrecurring gains from the sale of
securities. Securities are a significant balance sheet com¬
ponent, accounting for approximately 16.6 percent of as¬
sets at commercial banks and 14.4 percent at national
banks. Realized gains or losses from a relatively small
portion of these assets can have a significant impact on
earnings. Historically, such gains have tended to move
closely with fluctuations in interest rates and, as a result,
they cannot be relied on to supply continued expansion in
earnings. For example, in calendar year 2000, when inter¬
est rates were generally rising, commercial banks realized
losses of $2.5 billion on securities. In the first quarter of
this year with interest rates declining, banks earned $1.2
Quarterly J ournal, Vol. 20, No. 2, J une 2001 1
billion from such sales. Without such gains, return on eq¬
uity would have been 85 basis points lower for commer¬
cial banks and 65 basis points lower for national banks.
As interest rates have moved down further since the end
of the first quarter, banks may continue to enjoy gains in
this area in the near term.
Figure 1—Return on equity (ROE) boosted by
securities gains
Commercial and national bank ROE Percent
*2001 data as of March 31, 2001. All other data as of year-end. Shaded areas
represent periods of recession.
Source: Integrated Banking Information System
In contrast, core earnings were under pressure in the past
quarter. Rapid growth in non-interest income has been a
key element in the strong earnings that banks have en¬
joyed in recent years. Since 1984, banks have recorded
an average annual expansion of over 11 percent in this
category. This area was even more impressive in the late
1990s, recording growth of over 20 percent year over year
at national banks in the first quarters of both 1998 and
1999. However, recently growth has dropped off sharply.
For example, in the first quarter of 2001 the year over year
increase in non-interest income was a scant 1.4 percent.
While all the factors behind the falloff are not yet clear, the
general slowing of the economy has been an important
contributing factor. Therefore it seems unlikely that there
will be a substantial rebound in this category until the
economy begins to grow more strongly.
Figure 2—Noninterest income growth well below
15-year average
National banks Percent
25
20
15
10
5
0
* 2001 data as of March 31, 2001. Year-to-year growth rate for the first quarter
of each year.
Source: Integrated Banking Information System
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 *
The net interest margin has continued to decline. The 3.45
percent margin for national banks in the first quarter rep¬
resents a 10-year low and is more than 50 basis points
below 1993 levels. Major macro-economic trends appear
to play an important part in this trend. A key function for
banks is to intermediate between depositors and borrow¬
ers; the former are willing to supply funds for relatively
short periods of time, and the latter are interested in se¬
curing financing for longer terms. As the general market
spread between long and short rates has narrowed in
recent years, reflecting a lessening of concern about infla¬
tion and a corresponding reduction in the premium for
longer dated risk, this has had a direct impact on net
interest margin. Another important element contributing to
the trend has been the heightened competition for funds,
which has forced banks to increase their reliance on more
expensive sources. Core deposits, which generally pro¬
vide the cheapest source of financing to banks, covered
only 46.6 percent of assets in the first quarter compared
2 Quarterly J ournal, Vol. 20, No. 2, J une 2001
to 46.7 percent a year ago and almost 80 percent at
year-end 1991.
Figure 3—Net interest margin declines to
10-year low
National banks Percent
I - 1 4-5
I-i-i-i-i-i-i-i-1-i-i-i-i-i-i-i-i-1-i-1 3.0
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01*
* 2001 data as of March 31,2001.
Source: Integrated Banking Information System
A deterioration in asset quality has also become a drain
on earnings through higher loan loss provisioning to main¬
tain or enhance reserves. Almost 18 percent of net inter¬
est income was offset by loan loss provisions by national
banks in the first quarter. This is comparable to the level in
1992, when the United States was coming out of the last
economic recession, although it remains well below the 30
percent reached in 1990 and 1991. Despite the pickup in
provisioning, noncurrent loans have continued to rise
more rapidly. The loss reserves to noncurrent loans ratio
declined to its lowest level since 1993. As asset quality
continues to deteriorate, we expect to see an increase in
provisioning by banks to replenish loan loss reserves,
which have declined relative to noncurrent and total loans.
Figure 4—Loan loss provisioning absorbs more of
net interest income
National banks Percent
Loss reserves lowest since 1993
Loss reserves to noncurrent loans
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 OO Ol
Data are for the first quarter of each year.
Source: Integrated Banking Information System
The deterioration in credit quality has predominantly
shown up in the commercial and industrial loan category.
Noncurrent commercial and industrial (C&l) loans have
risen by 22 basis points since the fourth quarter. This
continues to be a more significant issue for large national
banks but in the first quarter there were signs that it has
begun to spread to smaller banks. Noncurrent credit card
loans also increased in the first quarter. So far asset qual¬
ity in real estate lending has held up fairly well, although
there is some slippage in construction loans. The concen¬
tration of the problem in business lending tracks develop¬
ments in the overall economy with corporate profits
declining and bond default rates moving up.
Table 2—Commercial and industrial (C&l),
credit card, and construction loans
show deterioration
Percent noncurrent in each category—national banks
Loan category
1999
2000
2001:1
Total noncurrent loans
0.98
1.22
1.31
C&I loans*
1.11
1.66
1.88
Banks under $1 B
1.19
1.20
1.27
Banks over $1 B
1.08
1.68
1.91
Credit card loans
2.00
1.89
2.15
Construction RE loans
0.63
0.82
0.90
* Includes “All other loans” for banks under $1 billion in assets.
Source: Integrated Banking Information System.
The slippage in credit quality is also relatively widespread
with small banks in 35 states reporting increases of 5
basis points or more in noncurrent loans in the last year. In
contrast, in the first quarter of 2000, banks in only five
states reported comparable deterioration.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 3
Figure 5—Shift from economic boom to slowdown
leads to deterioration in loan quality
Increase in noncurrent loans ratio at small banks, 2000 Q1 to 2001 Q1
Source: Integrated Banking Information System
Although the credit quality of loans to individuals has gen¬
erally not shown signs of stress comparable to that for
business lending, pressure is also increasing on the con¬
sumer. Debt servicing levels have risen and now account
for a relatively high 14.3 percent of disposable income.
Mortgage refinancing is providing an opportunity for
homeowners to take advantage of lower long-term rates
and correspondingly mortgage debt has been rising.
However, unlike the 1986-1992 period, when consumers
were using the proceeds to reduce other shorter term
obligations, debt servicing is continuing to increase.
Figure 6—Consumer is also under pressure
Consumer debt trends
80%
75%
70%
65%
60%
r' I,- ..... . Mortgage debt AND overall debt
Consumers rolling high-interest, -
short-term, non-deductible debt into ur en rism 8-
mortgages = easing debt burden
Source: Haver Analytics/from Federal Reserve, "Row of Funds" data.
So far, as noted above, despite the slower economy, ap¬
preciation in home values has continued to be robust and
widespread. This has been an important offset to weaken¬
ing equity markets and, together with lower mortgage
rates, has increased consumers’ financial flexibility. It has
also provided an important psychological boost.
Figure 7—So far, housing appreciation has
provided a cushion
Source: Office of Federal Housing Enterprise Oversight
However, gains in housing prices may not be sustained.
In the past, they have faded when the economy slowed.
In the first half of 1990s, for example, home appreciation
was subdued and it took several years of strong eco¬
nomic growth before housing prices picked up substan¬
tially. If the general economic malaise does spill over into
this sector, it is likely to be especially significant for con¬
struction loans, the most rapidly growing area of real es¬
tate lending.
4 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Figure 8—But housing price gains tend to fade
quickly as economy weakens
Figure 9—Some states vulnerable to combination
of negatives
Sources: Department of Commerce and Office of Federal Housing Enterprise
Oversight
Note: Northwest TX, northwest FL, western PA, western half of MO also have
tight electricity capacity.
Sources: Haver Analytics/Bureau of Labor Statistics and North American
Electric Reliability Council (NERC)
Manufacturing has been hardest hit in the current slow¬
down and employment in the sector has been pared
back. As a result, regions that are heavily dependent on
manufacturing are experiencing the downturn more se¬
verely. This is particularly the case in Midwest, the South¬
east and the central part of the country.
In addition, there are concerns about the potential impact
of energy shortages this summer in certain states. While
California has gotten the most press, there are several
other areas where spare electricity capacity is below 15
percent. Manufacturing is a heavy consumer of electricity
and areas in the central part of the country look particu¬
larly vulnerable, having both a dependence on manufac¬
turing industries and tight electricity supplies.
Conclusion
Although banks reported strong first quarter results, these
were primarily supported by nonrecurring income and the
squeeze to core earnings is likely to continue through this
year. Banks have begun to recognize the deterioration in
their loan book by increased provisioning. With the overall
U.S. economy remaining weak, it is likely that further ad¬
ditions to reserves will be needed in future quarters. More¬
over, much of the steam has come out of growth in non¬
interest income, which was a key element in the recent
string of record performances. If interest rates continue to
soften, gains on securities sales may offset some of the
weakness in other areas. However, continued growth in
bank earnings is dependent on an economic rebound in
the second half of the year.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 5
Key indicators, FDIC-insured national banks
Annual 1997-2000, year-to-date through March 31, 2001, first quarter 2000, and first quarter 2001
(Dollar figures in millions)
1997
1998
1999
2000
Preliminary
2001YTD
2000Q1
Preliminary
2001Q1
Number of institutions reporting.
2,597
2,456
2,364
2,230
2,201
2,327
2,201
Total employees (FTEs).
912,463
974,871
983,186
948,648
966,748
963,540
966,748
Selected income data ($)
Net income.
$35,782
$37,607
$42,590
$38,973
$11,434
$11,536
$11,434
Net interest income.
106,639
110,985
114,534
115,905
29,745
29,119
29,745
Provision for loan losses.
13,065
15,242
15,548
20,536
5,321
4,114
5,321
Noninterest income.
65,429
81,344
92,672
96,187
25,053
24,703
25,053
Noninterest expense.
104,682
122,606
125,812
128,539
32,164
31,088
32,164
Net operating income.
34,993
35,548
42,415
40,222
11,393
11,978
11,393
Cash dividends declared.
28,587
25,414
29,870
32,325
7,042
6,723
7,042
Net charge-offs to loan and lease reserve_
12,661
14,492
14,176
17,231
4,797
3,639
4,797
Selected condition data ($)
Total assets.
2,893,910
3,183,384
3,271,262
3,414,469
3,440,218
3,301,903
3,440,218
Total loans and leases.
1,840,485
2,015,585
2,127,880
2,227,081
2,251,533
2,141,396
2,251,533
Reserve for losses.
34,865
36,810
37,687
40,007
40,641
37,989
40,641
Securities.
452,118
516,117
537,185
502,296
487,081
533,927
487,081
Other real estate owned.
2,112
1,833
1,572
1,553
1,639
1,533
1,639
Noncurrent loans and leases.
17,878
19,513
20,814
27,163
29,403
21,703
29,403
Total deposits.
2,004,867
2,137,946
2,154,276
2,250,464
2,262,226
2,166,617
2,262,226
Domestic deposits.
1,685,316
1,785,856
1,776,129
1,827,126
1,871,693
1,785,434
1,871,693
Equity capital.
244,794
274,192
278,013
293,859
306,175
281,214
306,175
Off-balance-sheet derivatives.
8,704,481
10,953,514
12,077,568
15,502,911
16,521,375
13,134,168
16,521,375
Performance ratios (annualized %)
Return on equity.
15.00
14.29
15.57
13.71
15.16
16.55
15.16
Return on assets.
1.29
1.24
1.35
1.18
1.33
1.41
1.33
Net interest income to assets.
3.83
3.67
3.63
3.50
3.45
3.55
3.45
Loss provision to assets.
0.47
0.50
0.49
0.62
0.62
0.50
0.62
Net operating income to assets.
1.26
1.18
1.35
1.22
1.32
1.46
1.32
Noninterest income to assets.
2.35
2.69
2.94
2.91
2.91
3.01
2.91
Noninterest expense to assets.
3.76
4.05
3.99
3.88
3.73
3.79
3.73
Loss provision to loans and leases.
0.73
0.79
0.76
0.95
0.95
0.77
0.95
Net charge-offs to loans and leases.
0.71
0.75
0.70
0.80
0.85
0.68
0.85
Loss provision to net charge-offs.
103.19
105.12
109.68
119.18
110.93
113.06
110.93
Performance ratios (%)
Percent of institutions unprofitable.
4.89
5.94
7.06
6.82
6.36
5.72
6.36
Percent of institutions with earnings gains....
67.96
61.60
62.18
66.91
54.79
65.02
54.34
Nonint. income to net operating revenue.
38.02
42.29
44.72
45.35
45.72
45.90
45.72
Nonint. expense to net operating revenue_
60.84
63.75
60.72
60.61
58.70
57.76
58.70
Condition ratios (%)
Nonperforming assets to assets.
0.70
0.68
0.70
0.86
0.91
0.71
0.91
Noncurrent loans to loans.
0.97
0.97
0.98
1.22
1.31
1.01
1.31
Loss reserve to noncurrent loans.
195.01
188.65
181.06
147.29
138.22
175.04
138.22
Loss reserve to loans.
1.89
1.83
1.77
1.80
1.81
1.77
1.81
Equity capital to assets.
8.46
8.61
8.50
8.61
8.90
8.52
8.90
Leverage ratio.
7.42
7.43
7.49
7.49
7.59
7.59
7.59
Risk-based capital ratio.
11.84
11.79
11.72
11.85
12.11
11.86
12.11
Net loans and leases to assets.
62.39
62.16
63.90
64.05
64.27
63.70
64.27
Securities to assets.
15.62
16.21
16.42
14.71
14.16
16.17
14.16
Appreciation in securities (% of par).
1.11
0.82
-2.45
-0.01
0.80
-2.57
0.80
Residential mortgage assets to assets.
20.10
20.41
20.60
19.60
20.53
20.55
20.53
Total deposits to assets.
69.28
67.16
65.85
65.91
65.76
65.62
65.76
Core deposits to assets.
51.59
49.72
47.01
45.61
46.60
46.67
46.60
Volatile liabilities to assets.
31.42
31.77
34.81
35.18
33.01
34.74
33.01
6 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured national banks
Annual 1997-2000, year-to-date through March 31, 2001, first quarter 2000, and first quarter 2001
(Dollar figures in millions)
1997
1998
1999
2000
Preliminary
2001YTD
2000Q1
Preliminary
2001Q1
Percent of loans past due 30-89 days
Total loans and leases.
1.32
1.27
1.16
1.26
1.21
1.12
1.21
Loans secured by real estate (RE).
1.39
1.33
1.22
1.42
1.35
1.18
1.35
1-4 family residential mortgages.
1.65
1.50
1.61
1.95
1.72
1.41
1.72
Home equity loans.
0.93
0.97
0.77
1.07
0.88
0.85
0.88
Multifamily residential mortgages.
1.33
0.94
0.69
0.59
0.70
0.67
0.70
Commercial RE loans.
0.95
1.02
0.70
0.72
0.84
0.80
0.84
Construction RE loans.
1.63
1.82
1.07
1.12
1.27
1.41
1.27
Commercial and industrial loans*.
0.76
0.81
0.71
0.71
0.72
0.78
0.72
Loans to individuals.
2.52
2.44
2.36
2.40
2.11
2.10
2.11
Credit cards.
2.75
2.52
2.53
2.50
2.46
2.36
2.46
Installment loans and other plans.
2.34
2.37
2.24
2.31
2.04
1.90
2.04
All other loans and leases.
0.46
0.46
0.50
0.58
0.75
0.56
0.75
Percent of loans noncurrent
Total loans and leases.
0.97
0.97
0.98
1.22
1.31
1.01
1.31
Loans secured by real estate (RE).
1.07
0.98
0.87
0.93
0.99
0.88
0.99
1-4 family residential mortgages.
1.01
0.95
0.91
1.06
1.12
0.92
1.12
Home equity loans.
0.43
0.41
0.32
0.41
0.43
0.35
0.43
Multifamily residential mortgages.
1.01
0.88
0.43
0.55
0.41
0.43
0.41
Commercial RE loans.
1.27
1.01
0.84
0.77
0.85
0.83
0.85
Construction RE loans.
1.00
0.80
0.63
0.82
0.90
0.80
0.90
Commercial and industrial loans.
0.78
0.86
1.11
1.66
1.88
1.23
1.88
Loans to individuals.
1.49
1.59
1.52
1.46
1.48
1.43
1.48
Credit cards.
2.03
2.06
2.00
1.89
2.15
1.93
2.15
Installment loans and other plans.
1.04
1.19
1.16
1.06
1.11
1.07
1.11
All other loans and leases.
0.27
0.31
0.40
0.85
0.84
0.46
0.84
Percent of loans charged-off, net
Total loans and leases.
0.71
0.75
0.70
0.80
0.85
0.68
0.85
Loans secured by real estate (RE).
0.06
0.05
0.10
0.12
0.16
0.10
0.16
1-4 family residential mortgages.
0.08
0.07
0.14
0.14
0.14
0.13
0.14
Home equity loans.
0.18
0.16
0.19
0.23
0.34
0.21
0.34
Multifamily residential mortgages.
0.01
0.07
0.02
0.03
0.06
-0.09
0.06
Commercial RE loans.
-0.01
-0.02
0.03
0.07
0.14
0.06
0.14
Construction RE loans.
-0.10
-0.01
0.03
0.05
0.12
0.01
0.12
Commercial and industrial loans*.
0.27
0.38
0.54
0.87
0.99
0.59
0.99
Loans to individuals.
2.86
2.92
2.65
2.84
2.70
2.75
2.70
Credit cards.
4.95
5.03
4.51
4.43
4.24
4.69
4.24
Installment loans and other plans.
1.20
1.23
1.27
1.54
1.46
1.32
1.46
All other loans and leases.
0.30
1.58
0.93
0.96
0.41
0.19
0.41
Loans outstanding ($)
Total loans and leases.
$1,840,485
$2,015,585
$2,127,880
$2,227,081
$2,251,533
$2,141,396
$2,251,533
Loans secured by real estate (RE).
725,305
764,944
853,141
892,153
918,720
869,005
918,720
I^t family residential mortgages.
363,329
381,597
433,807
443,088
457,331
438,018
457,331
Home equity loans.
67,669
66,091
67,267
82,672
86,033
70,303
86,033
Multifamily residential mortgages.
23,346
23,201
26,561
28,021
28,676
28,363
28,676
Commercial RE loans.
190,067
200,469
214,145
221,218
223,943
219,281
223,943
Construction RE loans.
47,410
56,261
71,578
76,884
82,998
73,296
82,998
Farmland loans.
10,178
10,930
11,957
12,346
12,395
12,112
12,395
RE loans from foreign offices.
23,306
26,396
27,825
27,923
27,344
27,632
27,344
Commercial and industrial loans.
508,589
583,903
622,006
647,001
650,357
632,617
650,357
Loans to individuals.
371,477
386,410
348,581
370,363
366,413
342,566
366,413
Credit cards**.
168,236
176,408
147,126
176,372
152,686
144,706
152,686
Other revolving credit plans.
na
na
na
na
19,823
na
19,823
Installment loans.
203,241
210,003
201,455
193,991
193,904
197,860
193,904
All other loans and leases.
237,326
282,367
306,042
319,145
317,580
298,906
317,580
Less: Unearned income.
2,212
2,039
1,890
1,581
1,536
1,699
1,536
'Includes “All other loans” for institutions under $1 billion in asset size.
"Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards” and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 7
Key indicators, FDIC-insured national banks by asset size
First quarter 2000 and first quarter 2001
(Dollar figures in millions)
j Less than $100M 1
$100M to $1B 1
1 $1B to $10B
[ Greater than $10B
2000Q1
2001Q1
2000Q1
2001Q1
2000Q1
2001Q1
2000Q1
2001Q1
Number of institutions reporting.
1,181
1,071
975
955
126
134
45
41
Total employees (FTEs).
29,483
25,728
106,295
94,835
113,576
117,509
714,186
728,676
Selected income data ($)
Net income.
$205
$146
$881
$817
$1,621
$1,499
$8,829
$8,973
Net interest income.
617
545
2,627
2,416
3,725
4,116
22,149
22,668
Provision for loan losses.
31
30
198
171
468
562
3,416
4,558
Noninterest income.
341
231
1,464
1,348
3,101
2,798
19,797
20,676
Noninterest expense.
673
553
2,594
2,439
3,764
4,122
24,057
25,050
Net operating income.
184
143
885
797
1,698
1,459
9,209
8,994
Cash dividends declared.
139
86
505
354
1,871
1,124
4,208
5,478
Net charge-offs to loan and lease reserve_
17
16
195
120
487
508
2,940
4,152
Selected condition data ($)
Total assets.
59,549
55,058
258,059
249,701
381,661
417,491
2,602,633
2,717,968
Total loans and leases.
34,916
32,655
161,187
156,104
242,236
266,130
1,703,057
1,796,644
Reserve for losses.
470
438
2,313
2,164
5,018
5,227
30,189
32,812
Securities.
16,366
13,335
67,366
59,042
87,624
86,104
362,572
328,600
Other real estate owned.
62
68
206
211
143
155
1,122
1,206
Noncurrent loans and leases.
337
319
1,343
1,343
2,026
2,729
17,998
25,011
Total deposits.
50,427
46,354
208,893
201,921
243,537
270,208
1,663,760
1,743,743
Domestic deposits.
50,427
46,354
208,441
201,664
240,937
267,987
1,285,629
1,355,687
Equity capital.
6,499
6,240
24,393
25,419
36,507
39,084
213,815
235,431
Off-balance-sheet derivatives.
31
62
1,962
2,124
43,594
39,613
13,378,835
16,670,121
Performance ratios (annualized %)
Return on equity.
12.73
9.51
14.62
13.03
17.74
15.58
16.68
15.46
Return on assets.
1.39
1.08
1.38
1.32
1.71
1.43
1.37
1.32
Net interest income to assets.
4.18
4.02
4.11
3.90
3.93
3.94
3.43
3.33
Loss provision to assets.
0.21
0.22
0.31
0.28
0.49
0.54
0.53
0.67
Net operating income to assets.
1.25
1.05
1.39
1.29
1.79
1.40
1.43
1.32
Noninterest income to assets.
2.31
1.70
2.29
2.17
3.27
2.68
3.07
3.03
Noninterest expense to assets.
4.56
4.07
4.06
3.93
3.97
3.95
3.72
3.67
Loss provision to loans and leases.
0.36
0.38
0.50
0.44
0.78
0.85
0.81
1.01
Net charge-offs to loans and leases.
0.19
0.20
0.49
0.31
0.81
0.77
0.69
0.92
Loss provision to net charge-offs.
187.48
185.35
101.62
141.92
96.21
110.63
116.18
109.77
Performance ratios (%)
Percent of institutions unprofitable.
9.23
9.99
1.85
3.04
2.38
2.99
6.67
0.00
Percent of institutions with earnings gains....
63.59
51.07
67.18
56.86
65.87
59.70
53.33
63.41
Nonint. income to net operating revenue.
35.58
29.71
35.79
35.81
45.43
40.47
47.20
47.70
Nonint. expense to net operating revenue....
70.24
71.30
63.39
64.80
55.14
59.62
57.35
57.79
Condition ratios (%)
Nonperforming assets to assets.
0.67
0.71
0.60
0.62
0.58
0.70
0.75
0.98
Noncurrent loans to loans.
0.97
0.98
0.83
0.86
0.84
1.03
1.06
1.39
Loss reserve to noncurrent loans.
139.60
137.06
172.24
161.11
247.70
191.51
167.74
131.19
Loss reserve to loans.
1.35
1.34
1.43
1.39
2.07
1.96
1.77
1.83
Equity capital to assets.
10.91
11.33
9.45
10.18
9.57
9.36
8.22
8.66
Leverage ratio.
11.10
11.13
9.43
9.73
8.63
8.23
7.17
7.22
Risk-based capital ratio.
18.15
18.17
14.59
15.04
13.23
13.29
11.38
11.66
Net loans and leases to assets.
57.84
58.52
61.56
61.65
62.15
62.49
64.28
64.90
Securities to assets.
27.48
24.22
26.10
23.65
22.96
20.62
13.93
12.09
Appreciation in securities (% of par).
-2.40
1.33
-2.61
1.37
-2.36
0.90
-2.63
0.65
Residential mortgage assets to assets.
21.46
21.63
24.94
24.09
27.36
26.10
19.09
19.33
Total deposits to asset.
84.68
84.19
80.95
80.87
63.81
64.72
63.93
64.16
Core deposits to assets.
72.76
70.71
68.79
67.19
54.49
54.28
42.73
43.04
Volatile liabilities to assets.
14.20
15.35
18.19
18.05
28.17
26.87
37.82
35.68
8 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured national banks by asset size
First quarter 2000 and first quarter 2001
(Dollar figures in millions)
Less than $100M
2000Q1 2001Q1
$100M to $1B
2000Q1 2001Q1
$1B to $10B
2000Q1 2001Q1
Greater than $10B
2000Q1 2001Q1
Percent of loans past due 30-89 days
Total loans and leases.
1.48
1.56
1.14
1.32
1.26
1.37
1.09
1.17
Loans secured by real estate (RE).
1.20
1.34
0.91
1.12
0.90
1.10
1.28
1.44
1-4 family residential mortgages.
1.45
1.52
1.12
1.29
0.88
1.17
1.54
1.88
Home equity loans.
0.48
0.85
0.59
0.78
0.73
0.98
0.89
0.87
Multifamily residential mortgages.
0.68
0.72
0.55
0.83
0.43
0.83
0.75
0.64
Commercial RE loans.
0.91
0.98
0.71
0.90
0.77
0.91
0.82
0.80
Construction RE loans.
1.22
1.83
0.92
1.27
1.63
1.36
1.45
1.22
Commercial and industrial loans*.
3.02
1.95
1.53
1.54
1.33
1.41
0.67
0.60
Loans to individuals.
1.89
2.04
1.84
1.96
2.04
2.06
2.14
2.13
Credit cards.
3.24
1.98
3.32
3.17
2.19
2.27
2.36
2.48
Installment loans and other plans.
1.82
2.09
1.46
1.79
1.87
2.00
1.97
2.08
All other loans and leases.
N/A
N/A
N/A
N/A
0.89
1.11
0.55
0.70
Percent of loans noncurrent
Total loans and leases.
0.97
0.98
0.83
0.86
0.84
1.03
1.06
1.39
Loans secured by real estate (RE).
0.79
0.83
0.63
0.72
0.64
0.75
0.97
1.09
1-4 family residential mortgages.
0.65
0.72
0.59
0.61
0.53
0.69
1.04
1.27
Home equity loans.
0.32
0.21
0.29
0.39
0.31
0.39
0.36
0.44
Multifamily residential mortgages.
0.57
0.37
0.32
0.53
0.38
0.58
0.45
0.35
Commercial RE loans.
0.76
0.97
0.73
0.82
0.79
0.83
0.86
0.85
Construction RE loans.
0.72
0.67
0.43
0.76
0.91
0.94
0.84
0.92
Commercial and industrial loans*.
2.42
1.64
1.50
1.33
0.98
1.52
1.22
1.94
Loans to individuals.
0.61
0.64
0.99
0.86
1.18
1.38
1.55
1.56
Credit cards.
1.39
1.33
3.10
2.87
1.64
2.28
1.96
2.11
Installment loans and other plans.
0.57
0.63
0.44
0.49
0.68
0.71
1.24
1.28
All other loans and leases.
N/A
N/A
N/A
N/A
0.61
0.53
0.45
0.85
Percent of loans charged-off, net
Total loans and leases.
0.19
0.20
0.49
0.31
0.81
0.77
0.69
0.92
Loans secured by real estate (RE).
0.01
0.03
0.02
0.05
0.10
0.14
0.12
0.18
1-4 family residential mortgages.
0.02
0.04
0.03
0.06
0.12
0.11
0.15
0.15
Home equity loans.
0.01
0.00
0.03
0.07
0.21
0.91
0.22
0.28
Multifamily residential mortgages.
0.03
0.00
0.02
0.00
-0.03
0.01
-0.13
0.08
Commercial RE loans.
0.00
0.01
0.01
0.05
0.08
0.05
0.07
0.19
Construction RE loans.
0.03
0.07
0.00
0.03
0.04
0.12
0.00
0.14
Commercial and industrial loans*.
0.42
0.47
0.30
0.33
0.40
0.63
0.62
1.07
Loans to individuals.
0.79
0.68
2.68
1.52
2.75
2.42
2.79
2.88
Credit cards.
4.55
1.68
10.78
5.30
4.30
3.92
4.52
4.28
Installment loans and other plans.
0.53
0.64
0.53
0.69
0.98
1.06
1.51
1.65
All other loans and leases.
N/A
N/A
N/A
N/A
0.17
0.34
0.19
0.42
Loans outstanding ($)
Total loans and leases.
$34,916
$32,655
$161,187
$156,104
$242,236
$266,130
$1,703,057
$1,796,644
Loans secured by real estate (RE).
20,089
18,912
98,114
97,455
121,759
136,952
629,043
665,401
1-4 family residential mortgages.
9,425
8,726
43,999
41,207
60,310
62,927
324,283
344,471
Home equity loans.
438
460
4,014
4,006
7,172
9,023
58,680
72,544
Multifamily residential mortgages.
464
411
3,396
3,467
4,479
4,882
20,024
19,916
Commercial RE loans.
5,818
5,436
34,011
35,080
36,151
42,293
143,301
141,135
Construction RE loans.
1,597
1,697
8,532
9,547
11,893
15,787
51,274
55,966
Farmland loans.
2,346
2,182
4,153
4,143
1,565
1,892
4,047
4,178
RE loans from foreign offices.
0
0
9
5
189
148
27,433
27,191
Commercial and industrial loans.
5,995
5,664
28,844
28,611
47,020
52,207
550,759
563,875
Loans to individuals.
4,934
4,439
24,601
20,632
58,364
58,613
254,668
282,730
Credit cards".
255
160
5,085
3,346
30,885
25,801
108,481
123,378
Other revolving credit plans.
na
102
na
566
na
1,790
na
17,365
Installment loans.
4,679
4,178
19,516
16,720
27,479
31,021
146,186
141,986
All other loans and leases.
3,983
3,700
9,908
9,625
15,179
18,470
269,836
285,784
Less: Unearned income.
85
60
280
220
85
111
1,249
1,145
'Includes “All other loans” for institutions under $1 billion in asset size.
"Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards” and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 9
Key indicators, FDIC-insured national banks by region
First quarter 2001
(Dollar figures in millions)
Northeast
Southeast
Central
Midwest
Southwest
West
All
institutions
Number of institutions reporting
257
307
442
439
523
233
2,201
Total employees (FTEs).
295,679
262,483
172,895
77,857
55,478
102,356
966,748
Selected income data ($)
Net income.
$3,081
$2,823
$1,789
$878
$425
$2,439
$11,434
Net interest income.
8,296
8,083
5,409
2,656
1,433
3,867
29,745
Provision for loan losses.
1,861
1,132
917
597
110
704
5,321
Noninterest income
9,532
5,395
2,958
2,268
573
4,326
25,053
Noninterest expense.
10,812
7,899
4,954
3,079
1,322
4,098
32,164
Net operating income.
3,291
2,816
1,665
824
404
2,392
11,393
Cash dividends declared.
2,078
1,980
639
539
286
1,520
7,042
Net charge-offs to loan and lease reserve_
1,650
1,064
844
528
83
629
4,797
Selected condition data ($)
Total assets.
960,342
1,020,719
679,300
276,019
150,213
353,624
3,440,218
Total loans and leases.
604,041
666,644
469,369
187,927
87,244
236,309
2,251,533
Reserve for losses.
12,612
10,626
7,587
3,070
1,256
5,489
40,641
Securities.
136,376
132,996
108,412
32,445
38,624
38,227
487,081
Other real estate owned.
443
600
245
112
107
133
1,639
Noncurrent loans and leases.
9,093
9,268
5,699
1,717
875
2,751
29,403
Total deposits.
657,578
670,205
425,774
174,597
120,750
213,322
2,262,226
Domestic deposits.
407,113
594,963
381,558
165,785
119,819
202,455
1,871,693
Equity capital.
83,041
92,300
52,184
27,148
14,409
37,093
306,175
Off-balance-sheet derivatives.
6,052,135
9,086,195
1,005,189
20,526
4,835
352,494
16,521,375
Performance ratios (annualized %)
Return on equity.
14.99
12.42
13.89
13.10
12.04
26.95
15.16
Return on assets.
1.29
1.09
1.05
1.26
1.14
2.78
1.33
Net interest income to assets.
3.48
3.12
3.19
3.80
3.86
4.42
3.45
Loss provision to assets.
0.78
0.44
0.54
0.85
0.30
0.80
0.62
Net operating income to assets.
1.38
1.09
0.98
1.18
1.09
2.73
1.32
Noninterest income to assets.
3.99
2.08
1.74
3.25
1.54
4.94
2.91
Noninterest expense to assets.
4.53
3.05
2.92
4.41
3.56
4.68
3.73
Loss provision to loans and leases.
1.23
0.68
0.78
1.25
0.51
1.21
0.95
Net charge-offs to loans and leases.
1.09
0.64
0.72
1.11
0.38
1.08
0.85
Loss provision to net charge-offs.
112.77
106.41
108.66
113.09
133.44
111.99
110.93
Performance ratios (%)
Percent of institutions unprofitable.
5.06
12.05
4.07
3.19
4.78
14.16
6.36
Percent of institutions with earnings gains....
59.92
54.07
53.17
54.44
52.01
55.79
54.34
Nonint. income to net operating revenue.
53.47
40.03
35.35
46.06
28.55
52.80
45.72
Nonint. expense to net operating revenue_
60.64
58.60
59.20
62.54
65.91
50.01
58.70
Condition ratios (%)
Nonperforming assets to assets.
1.01
0.97
0.90
0.66
0.65
0.85
0.91
Noncurrent loans to loans.
1.51
1.39
1.21
0.91
1.00
1.16
1.31
Loss reserve to noncurrent loans.
138.71
114.66
133.12
178.84
143.55
199.50
138.22
Loss reserve to loans.
2.09
1.59
1.62
1.63
1.44
2.32
1.81
Equity capital to assets.
8.65
9.04
7.68
9.84
9.59
10.49
8.90
Leverage ratio.
7.66
7.35
7.24
7.73
8.29
8.40
7.59
Risk-based capital ratio.
12.40
11.78
11.60
12.40
13.44
12.62
12.11
Net loans and leases to assets.
61.59
64.27
67.98
66.97
57.24
65.27
64.27
Securities to assets.
14.20
13.03
15.96
11.75
25.71
10.81
14.16
Appreciation in securities (% of par).
0.57
0.48
0.77
1.43
1.51
1.58
0.80
Residential mortgage assets to assets.
14.09
25.69
21.35
19.21
26.12
20.24
20.53
Total deposits to assets.
68.47
65.66
62.68
63.26
80.39
60.32
65.76
Core deposits to assets.
34.63
50.97
47.60
54.25
66.58
50.11
46.60
Volatile liabilities to assets.
43.89
28.08
33.43
25.90
19.85
28.00
33.01
10 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured national banks by region
First quarter 2001
(Dollar figures in millions)
Northeast
Southeast
Central
Midwest
Southwest
West
All
institutions
Percent of loans past due 30-89 days
Total loans and leases.
1.13
1.05
1.38
1.40
1.40
1.29
1.21
Loans secured by real estate (RE).
1.23
1.48
1.55
0.92
1.30
1.14
1.35
1-4 family residential mortgages
1.51
2.03
1.95
0.89
1.24
1.36
1.72
Home equity loans.
0.64
0.71
1.26
0.69
0.65
0.90
0.88
Multifamily residential mortgages.
0.36
0.58
0.79
0.80
0.82
1.00
0.70
Commercial RE loans.
0.66
0.68
1.07
0.89
1.18
0.77
0.84
Construction RE loans.
0.58
1.10
1.61
1.01
1.78
1.34
1.27
Commercial and industrial loans*.
0.46
0.45
0.99
1.53
1.36
1.00
0.72
Loans to individuals.
2.49
1.72
1.96
1.92
1.72
2.07
2.11
Credit cards.
2.85
2.31
1.49
1.86
1.12
2.19
2.46
Installment loans and other plans.
2.36
1.63
2.09
2.39
1.81
2.15
2.04
All other loans and leases.
0.54
0.34
1.08
1.88
1.56
1.00
0.75
Percent of loans noncurrent
Total loans and leases.
1.51
1.39
1.21
0.91
1.00
1.16
1.31
Loans secured by real estate (RE).
1.11
1.10
1.17
0.52
0.77
0.61
0.99
1-4 family residential mortgages.
0.97
1.39
1.38
0.44
0.71
0.58
1.12
Home equity loans.
0.28
0.21
0.85
0.30
0.30
0.34
0.43
Multifamily residential mortgages.
0.45
0.29
0.54
0.25
0.13
0.69
0.41
Commercial RE loans.
0.82
0.85
1.08
0.53
0.89
0.66
0.85
Construction RE loans.
0.68
1.10
1.02
0.81
0.60
0.69
0.90
Commercial and industrial loans*.
1.69
2.37
1.70
1.16
1.68
1.89
1.88
Loans to individuals.
2.48
0.62
0.69
1.19
0.54
1.52
1.48
Credit cards.
2.61
1.60
0.88
1.53
0.83
1.96
2.15
Installment loans and other plans.
2.72
0.37
0.69
1.03
0.55
0.66
1.11
All other loans and leases.
0.62
0.84
0.85
1.28
1.18
1.34
0.84
Percent of loans charged-off, net
Total loans and leases.
1.09
0.64
0.72
1.11
0.38
1.08
0.85
Loans secured by real estate (RE).
0.13
0.16
0.22
0.28
0.03
0.03
0.16
1-4 family residential mortgage.
0.10
0.12
0.24
0.24
0.04
0.01
0.14
Home equity loans.
0.36
0.37
0.30
0.27
0.17
0.36
0.34
Multifamily residential mortgages.
0.00
0.08
0.07
0.14
-0.01
0.00
0.06
Commercial RE loans.
0.02
0.14
0.24
0.33
0.02
0.01
0.14
Construction RE loans.
0.13
0.29
0.09
0.15
-0.02
-0.10
0.12
Commercial and industrial loans*.
0.78
1.11
1.03
1.32
0.78
1.02
0.99
Loans to individuals.
3.52
1.95
1.64
2.89
0.97
3.16
2.70
Credit cards.
4.53
3.55
4.86
4.15
1.41
3.86
4.24
Installment loans and other plans.
1.95
1.45
1.20
1.30
0.95
1.34
1.46
All other loans and leases.
0.16
0.19
0.74
0.47
0.26
1.35
0.41
Loans outstanding ($)
Total loans and leases.
$604,041
$666,644
$469,369
$187,927
$87,244
$236,309
$2,251,533
Loans secured by real estate (RE).
166,875
313,370
203,967
78,880
45,819
109,808
918,720
1-4 family residential mortgages.
82,201
176,057
93,535
37,113
18,358
50,067
457,331
Home equity loans.
16,200
28,440
25,117
6,233
1,088
8,955
86,033
Multifamily residential mortgages.
3,298
9,862
7,713
2,620
1,496
3,687
28,676
Commercial RE loans.
32,898
67,943
53,833
20,943
16,244
32,082
223,943
Construction RE loans.
7,415
25,532
20,358
8,854
7,047
13,791
82,998
Farmland loans.
479
2,599
3,400
3,116
1,586
1,216
12,395
RE loans from foreign offices.
24,385
2,937
12
0
0
10
27,344
Commercial and industrial loans.
193,452
196,526
136,543
46,536
23,221
54,079
650,357
Loans to individuals.
132,036
70,666
62,021
38,133
13,122
50,436
366,413
Credit cards**.
76,940
15,437
6,594
18,944
354
34,416
152,686
Other revolving credit plans.
8,693
2,829
1,981
3,282
513
2,526
19,823
Installment loans.
46,402
52,400
53,446
15,907
12,255
13,494
193,904
All other loans and leases.
112,496
86,424
66,948
24,394
5,203
22,116
317,580
Less: Unearned income.
819
342
110
16
121
129
1,536
'Includes “All other loans;; for institutions under $1 billion in asset size.
"Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards” and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 11
Key indicators, FDIC-insured commercial banks
Annual 1997-2000, year-to-date through March 31, 2001, first quarter 2000, and first quarter 2001
(Dollar figures in millions)
1997
1998
1999
2000
Preliminary
2001YTD
2000Q1
Preliminary
2001Q1
Number of institutions reporting.
9,142
8,774
8,581
8,314
8,237
8,516
8,237
Total employees (FTEs).
1,538,408
1,627,073
1,657,688
1,669,625
1,681,725
1,648,826
1,681,725
Selected income data ($)
Net income.
$59,156
$61,785
$71,551
$71,042
$19,878
$19,501
$19,878
Net interest income.
174,502
182,753
192,207
203,825
51,813
50,076
51,813
Provision for loan losses.
19,851
22,216
21,815
29,955
7,938
5,819
7,938
Noninterest income.
104,499
123,699
144,403
153,435
40,150
38,438
40,150
Noninterest expense.
169,983
194,143
204,216
215,963
54,991
51,993
54,991
Net operating income.
57,928
59,227
71,317
72,631
19,379
19,965
19,379
Cash dividends declared.
42,541
41,004
51,937
53,816
13,450
11,535
13,450
Net charge-offs to loan and lease reserve_
18,318
20,740
20,361
24,761
6,968
5,047
6,968
Selected condition data ($)
Total assets.
5,014,942
5,442,588
5,735,240
6,239,080
6,310,814
5,845,520
6,310,814
Total loans and leases.
2,970,747
3,238,342
3,491,665
3,816,522
3,828,145
3,567,939
3,828,145
Reserve for losses.
54,685
57,262
58,773
64,090
64,665
59,861
64,665
Securities.
871,868
979,854
1,046,410
1,077,765
1,047,974
1,056,607
1,047,974
Other real estate owned.
3,795
3,150
2,796
2,904
3,053
2,765
3,053
Noncurrent loans and leases.
28,542
31,253
32,997
42,922
46,090
34,603
46,090
Total deposits.
3,421,726
3,681,443
3,831,132
4,176,942
4,183,723
3,877,329
4,183,723
Domestic deposits.
2,895,531
3,109,409
3,175,543
3,470,276
3,512,628
3,237,841
3,512,628
Equity capital.
417,774
462,150
479,761
529,478
546,240
491,546
546,240
Off-balance-sheet derivatives.
25,063,799
33,005,561
34,817,484
40,571,148
43,921,632
36,925,725
43,921,632
Performance ratios (annualized %)
Return on equity.
14.68
13.93
15.31
14.04
14.78
16.05
14.78
Return on assets.
1.23
1.19
1.31
1.19
1.27
1.35
1.27
Net interest income to assets.
3.64
3.51
3.51
3.41
3.30
3.46
3.30
Loss provision to assets.
0.41
0.43
0.40
0.50
0.51
0.40
0.51
Net operating income to assets.
1.21
1.14
1.30
1.22
1.24
1.38
1.24
Noninterest income to assets.
2.18
2.37
2.64
2.57
2.56
2.65
2.56
Noninterest expense to assets.
3.54
3.73
3.73
3.61
3.51
3.59
3.51
Loss provision to loans and leases.
0.69
0.72
0.66
0.82
0.83
0.66
0.83
Net charge-offs to loans and leases.
0.64
0.67
0.61
0.67
0.73
0.57
0.73
Loss provision to net charge-offs.
108.37
104.81
107.14
120.97
113.92
115.34
113.92
Performance ratios (%)
Percent of institutions unprofitable.
4.85
6.11
7.48
7.23
6.86
6.49
6.86
Percent of institutions with earnings gains....
68.35
61.21
62.81
67.55
52.94
67.75
52.18
Nonint. income to net operating revenue.
37.45
40.36
42.90
42.95
43.66
43.43
43.66
Nonint. expense to net operating revenue_
60.93
63.35
60.67
60.45
59.80
58.74
59.80
Condition ratios (%)
Nonperforming assets to assets.
0.66
0.65
0.63
0.74
0.79
0.65
0.79
Noncurrent loans to loans.
0.96
0.97
0.95
1.12
1.20
0.97
1.20
Loss reserve to noncurrent loans.
191.59
183.22
178.11
149.32
140.30
172.99
140.30
Loss reserve to loans.
1.84
1.77
1.68
1.68
1.69
1.68
1.69
Equity capital to assets.
8.33
8.49
8.37
8.49
8.66
8.41
8.66
Leverage ratio.
7.56
7.54
7.79
7.70
7.68
7.79
7.68
Risk-based capital ratio.
12.23
12.23
12.16
12.13
12.28
12.25
12.28
Net loans and leases to assets.
58.15
58.45
59.86
60.14
59.64
60.01
59.64
Securities to assets.
17.39
18.00
18.25
17.27
16.61
18.08
16.61
Appreciation in securities (% of par).
1.10
1.07
-2.31
0.20
1.00
-2.47
1.00
Residential mortgage assets to assets.
20.03
20.93
20.78
20.19
20.44
20.80
20.44
Total deposits to assets.
68.23
67.64
66.80
66.95
66.29
66.33
66.29
Core deposits to assets.
50.06
49.39
46.96
46.40
46.56
46.83
46.56
Volatile liabilities to assets.
31.92
31.68
34.94
34.98
34.09
34.96
34.09
12 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured commercial banks
Annual 1997-2000, year-to-date through March 31, 2001, first quarter 2000, and first quarter 2001
(Dollar figures in millions)
1997
1998
1999
2000
Preliminary
2001YTD
2000Q1
Preliminary
2001Q1
Percent of loans past due 30-89 days
Total loans and leases.
1.31
1.26
1.14
1.26
1.23
1.12
1.23
Loans secured by real estate (RE).
1.33
1.26
1.09
1.26
1.23
1.08
1.23
1-4 family residential mortgages.
1.59
1.44
1.43
1.72
1.51
1.27
1.51
Home equity loans.
0.96
0.98
0.75
0.98
0.85
0.77
0.85
Multifamily residential mortgages.
1.11
0.86
0.57
0.55
0.64
0.58
0.64
Commercial RE loans.
0.97
0.99
0.69
0.74
0.87
0.79
0.87
Construction RE loans.
1.42
1.50
0.98
1.06
1.24
1.27
1.24
Commercial and industrial loans*.
0.83
0.88
0.79
0.83
0.88
0.89
0.88
Loans to individuals.
2.50
2.43
2.33
2.46
2.15
2.06
2.15
Credit cards.
2.73
2.58
2.59
2.66
2.54
2.36
2.54
Installment loans and other plans.
2.33
2.33
2.18
2.32
2.07
1.88
2.07
All other loans and leases.
0.51
0.51
0.55
0.66
0.87
0.56
0.87
Percent of loans noncurrent
Total loans and leases.
0.96
0.97
0.95
1.12
1.20
0.97
1.20
Loans secured by real estate (RE).
1.01
0.91
0.79
0.81
0.87
0.79
0.87
1-4 family residential mortgages.
0.94
0.88
0.82
0.90
0.95
0.82
0.95
Home equity loans.
0.44
0.42
0.33
0.37
0.44
0.34
0.44
Multifamily residential mortgages.
0.95
0.83
0.41
0.44
0.39
0.38
0.39
Commercial RE loans.
1.21
0.95
0.77
0.72
0.79
0.77
0.79
Construction RE loans.
0.97
0.81
0.67
0.76
0.86
0.74
0.86
Commercial and industrial loans.
0.86
0.99
1.17
1.66
1.82
1.28
1.82
Loans to individuals.
1.47
1.52
1.42
1.40
1.41
1.35
1.41
Credit cards.
2.18
2.22
2.05
2.01
2.18
1.98
2.18
Installment loans and other plans.
0.98
1.06
1.04
0.98
1.04
0.97
1.04
All other loans and leases.
0.25
0.34
0.39
0.70
0.80
0.42
0.80
Percent of loans charged-off, net
Total loans and leases.
0.64
0.67
0.61
0.67
0.73
0.57
0.73
Loans secured by real estate (RE).
0.06
0.05
0.08
0.09
0.12
0.07
0.12
1-4 family residential mortgages.
0.08
0.07
0.11
0.11
0.10
0.10
0.10
Home equity loans.
0.16
0.14
0.15
0.18
0.25
0.16
0.25
Multifamily residential mortgages.
0.04
0.05
0.02
0.03
0.03
-0.04
0.03
Commercial RE loans.
0.01
0.00
0.03
0.05
0.10
0.04
0.10
Construction RE loans.
-0.02
0.01
0.04
0.05
0.11
0.02
0.11
Commercial and industrial loans*.
0.28
0.42
0.58
0.81
0.90
0.52
0.90
Loans to individuals.
2.70
2.69
2.32
2.42
2.43
2.35
2.43
Credit cards.
5.11
5.19
4.46
4.39
4.44
4.55
4.44
Installment loans and other plans.
1.04
1.04
1.04
1.18
1.17
1.03
1.17
All other loans and leases.
0.32
1.55
1.02
0.93
0.38
0.17
0.38
Loans outstanding ($)
Total loans and leases.
$2,970,747
$3,238,342
$3,491,665
$3,816,522
$3,828,145
$3,567,939
$3,828,145
Loans secured by real estate (RE).
1,244,985
1,345,644
1,510,393
1,670,663
1,699,384
1,561,389
1,699,384
I^t family residential mortgages.
620,599
668,752
737,145
789,191
795,907
754,457
795,907
Home equity loans.
98,163
96,647
102,339
127,496
130,123
108,047
130,123
Multifamily residential mortgages.
41,231
43,242
53,168
60,207
60,960
57,277
60,960
Commercial RE loans.
341,522
370,544
417,634
465,556
469,305
434,027
469,305
Construction RE loans.
88,242
106,729
135,647
162,138
173,709
142,477
173,709
Farmland loans.
27,072
29,096
31,902
34,043
34,269
32,739
34,269
RE loans from foreign offices.
28,157
30,635
32,558
32,033
35,111
32,366
35,111
Commercial and industrial loans.
794,998
898,556
970,986
1,050,638
1,045,503
1,000,927
1,045,503
Loans to individuals.
561,325
570,863
558,372
609,724
597,505
556,694
597,505
Credit cards**.
231,092
228,781
211,998
249,363
216,527
207,636
216,527
Other revolving credit plans.
na
na
na
na
26,680
na
26,680
Installment loans.
330,233
342,081
346,374
360,361
354,299
349,058
354,299
All other loans and leases.
373,907
427,397
455,584
488,412
488,527
452,180
488,527
Less: Unearned income.
4,469
4,117
3,671
2,915
2,774
3,252
2,774
'Includes “All other loans” for institutions under $1 billion in asset size.
"Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards” and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 13
Key indicators, FDIC-insured commercial banks by asset size
First quarter 2000 and first quarter 2001
(Dollar figures in millions)
j Less than $100M 1
$100M to $1B 1
$1B to $10B
[ Greater than $10B
2000Q1
2001Q1
2000Q1
2001Q1
2000Q1
2001Q1
2000Q1
2001Q1
Number of institutions reporting.
5,091
4,759
3,047
3,088
299
311
79
79
Total employees (FTEs).
105,917
96,842
302,216
290,591
261,760
248,767
978,933
1,045,525
Selected income data ($)
Net income.
$677
$566
$2,502
$2,434
$3,287
$3,040
$13,036
$13,839
Net interest income.
2,453
2,231
7,896
7,641
8,497
8,583
31,231
33,358
Provision for loan losses.
125
125
527
531
1,074
1,215
4,092
6,067
Noninterest income.
664
572
3,056
3,086
5,775
5,044
28,944
31,447
Noninterest expense.
2,102
1,948
6,799
6,793
8,049
7,952
35,043
38,298
Net operating income.
663
552
2,512
2,375
3,365
2,946
13,425
13,506
Cash dividends declared.
436
364
1,327
1,124
2,793
3,795
6,979
8,167
Net charge-offs to loan and lease reserve_
60
70
379
357
923
1,038
3,685
5,503
Selected condition data ($)
Total assets.
238,633
229,489
761,754
781,116
856,964
884,054
3,988,169
4,416,155
Total loans and leases.
143,774
139,920
488,810
505,940
544,404
567,665
2,390,951
2,614,620
Reserve for losses.
2,052
1,955
7,030
7,189
10,174
10,467
40,605
45,054
Securities.
64,868
54,120
190,646
171,950
201,950
189,661
599,142
632,243
Other real estate owned.
267
269
664
726
401
410
1,432
1,649
Noncurrent loans and leases.
1,377
1,407
3,838
4,369
4,683
5,856
24,706
34,458
Total deposits.
202,735
193,934
620,983
639,033
579,747
612,433
2,473,864
2,738,324
Domestic deposits.
202,733
193,933
618,939
637,233
567,613
600,161
1,848,556
2,081,300
Equity capital.
25,755
25,690
70,821
76,392
77,080
82,085
317,889
362,072
Off-balance-sheet derivatives.
197
140
6,993
6,706
93,223
79,948
37,296,939
44,244,972
Performance ratios (annualized %)
Return on equity.
10.58
8.94
14.30
12.96
17.16
15.10
16.61
15.51
Return on assets.
1.14
1.00
1.33
1.26
1.55
1.38
1.32
1.26
Net interest income to assets.
4.15
3.94
4.19
3.95
4.00
3.89
3.16
3.04
Loss provision to assets.
0.21
0.22
0.28
0.27
0.51
0.55
0.41
0.55
Net operating income to assets.
1.12
0.97
1.33
1.23
1.58
1.33
1.36
1.23
Noninterest income to assets.
1.12
1.01
1.62
1.60
2.72
2.28
2.93
2.86
Noninterest expense to assets.
3.56
3.44
3.61
3.52
3.79
3.60
3.54
3.49
Loss provision to loans and leases.
0.35
0.36
0.44
0.42
0.80
0.86
0.69
0.93
Net charge-offs to loans and leases.
0.17
0.20
0.31
0.28
0.68
0.73
0.62
0.84
Loss provision to net charge-offs.
208.02
178.94
139.13
148.58
116.35
117.03
111.12
110.25
Performance ratios (%)
Percent of institutions unprofitable.
9.70
10.28
1.61
2.17
2.34
2.57
3.80
1.27
Percent of institutions with earnings gains....
65.72
47.01
71.15
58.84
69.57
63.02
60.76
60.76
Nonint. income to net operating revenue.
21.30
20.41
27.90
28.77
40.47
37.02
48.10
48.53
Nonint. expense to net operating revenue....
67.47
69.52
62.08
63.33
56.40
58.35
58.23
59.10
Condition ratios (%)
Nonperforming assets to assets.
0.69
0.73
0.59
0.65
0.60
0.72
0.67
0.83
Noncurrent loans to loans.
0.96
1.01
0.79
0.86
0.86
1.03
1.03
1.32
Loss reserve to noncurrent loans.
149.09
139.00
183.16
164.53
217.28
178.75
164.35
130.75
Loss reserve to loans.
1.43
1.40
1.44
1.42
1.87
1.84
1.70
1.72
Equity capital to assets.
10.79
11.19
9.30
9.78
8.99
9.29
7.97
8.20
Leverage ratio.
11.03
10.96
9.31
9.37
8.47
8.33
7.16
7.07
Risk-based capital ratio.
17.80
17.44
14.25
14.29
12.99
12.86
11.53
11.65
Net loans and leases to assets.
59.39
60.12
63.25
63.85
62.34
63.03
58.93
58.19
Securities to assets.
27.18
23.58
25.03
22.01
23.57
21.45
15.02
14.32
Appreciation in securities (% of par).
-2.42
1.33
-2.51
1.37
-2.55
0.97
-2.43
0.87
Residential mortgage assets to assets.
21.03
21.16
23.65
23.31
26.87
25.47
18.94
18.88
Total deposits to assets.
84.96
84.51
81.52
81.81
67.65
69.28
62.03
62.01
Core deposits to assets.
73.00
71.03
69.00
67.73
55.24
55.33
39.23
39.78
Volatile liabilities to assets.
14.05
15.10
18.06
18.11
28.55
27.38
40.81
39.24
14 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured commercial banks by asset size
First quarter 2000 and first quarter 2001
(Dollar figures in millions)
Less than $100M
2000Q1 2001Q1
$100M to $1B
2000Q1 2001Q1
$1B to $10B
2000Q1 2001Q1
Greater than $10B
2000Q1 2001Q1
Percent of loans past due 30-89 days
Total loans and leases.
1.60
1.78
1.19
1.37
1.25
1.34
1.04
1.16
Loans secured by real estate (RE).
1.33
1.53
0.98
1.19
0.89
1.04
1.16
1.29
1-4 family residential mortgages.
1.60
1.77
1.22
1.39
0.94
1.11
1.36
1.62
Home equity loans.
0.65
1.00
0.65
0.85
0.69
0.95
0.81
0.83
Multifamily residential mortgages.
0.81
0.73
0.50
0.72
0.48
0.86
0.62
0.54
Commercial RE loans.
1.00
1.23
0.75
0.92
0.78
0.88
0.80
0.80
Construction RE loans.
1.16
1.42
1.07
1.46
1.19
1.24
1.41
1.14
Commercial and industrial loans'.
1.89
1.98
1.40
1.53
1.36
1.38
0.66
0.68
Loans to individuals.
2.10
2.38
1.87
2.08
2.16
2.22
2.06
2.14
Credit cards.
2.38
2.16
3.29
4.21
2.56
2.65
2.23
2.45
Installment loans and other plans.
2.09
2.45
1.59
1.88
1.83
2.09
1.95
2.08
All other loans and leases.
N/A
N/A
N/A
N/A
1.00
1.20
0.55
0.77
Percent of loans noncurrent
Total loans and leases.
0.96
1.01
0.79
0.86
0.86
1.03
1.03
1.32
Loans secured by real estate (RE).
0.78
0.87
0.62
0.71
0.71
0.78
0.88
0.95
1-4 family residential mortgages.
0.69
0.78
0.60
0.65
0.69
0.78
0.93
1.08
Home equity loans.
0.25
0.31
0.31
0.38
0.34
0.41
0.35
0.46
Multifamily residential mortgages.
0.54
0.43
0.43
0.46
0.42
0.54
0.34
0.32
Commercial RE loans.
0.77
0.98
0.64
0.73
0.78
0.80
0.84
0.80
Construction RE loans.
0.58
0.77
0.56
0.83
0.82
0.89
0.79
0.86
Commercial and industrial loans'.
1.39
1.32
1.20
1.26
1.08
1.58
1.26
1.92
Loans to individuals.
0.76
0.88
0.85
0.88
1.10
1.24
1.54
1.54
Credit cards.
1.28
2.00
2.61
3.32
1.73
2.22
2.02
2.12
Installment loans and other plans.
0.74
0.87
0.51
0.57
0.58
0.68
1.22
1.25
All other loans and leases.
N/A
N/A
N/A
N/A
0.58
0.70
0.42
0.78
Percent of loans charged-off, net
Total loans and leases.
0.17
0.20
0.31
0.28
0.68
0.73
0.62
0.84
Loans secured by real estate (RE).
0.03
0.04
0.02
0.04
0.07
0.10
0.09
0.15
1-4 family residential mortgages.
0.04
0.04
0.04
0.05
0.09
0.09
0.12
0.13
Home equity loans.
0.04
0.04
0.04
0.07
0.17
0.51
0.18
0.23
Multifamily residential mortgages.
0.03
0.11
0.01
0.02
0.02
-0.02
-0.07
0.05
Commercial RE loans.
0.02
0.04
0.01
0.05
0.03
0.06
0.05
0.16
Construction RE loans.
0.03
0.08
0.00
0.02
0.05
0.12
0.01
0.14
Commercial and industrial loans*.
0.24
0.29
0.28
0.39
0.48
0.67
0.56
1.00
Loans to individuals.
0.60
0.72
1.75
1.38
2.62
2.78
2.48
2.57
Credit cards.
3.30
2.02
7.82
5.92
4.60
5.04
4.31
4.25
Installment loans and other plans.
0.48
0.67
0.54
0.68
0.98
1.22
1.21
1.30
All other loans and leases.
N/A
N/A
N/A
N/A
0.21
0.35
0.18
0.40
Loans outstanding ($)
Total loans and leases.
$143,774
$139,920
$488,810
$505,940
$544,404
$567,665
$2,390,951
$2,614,620
Loans secured by real estate (RE).
82,671
80,960
311,286
328,432
288,730
308,710
878,702
981,281
1-4 family residential mortgages.
38,386
36,906
128,210
130,186
130,671
128,832
457,189
499,983
Home equity loans.
1,889
2,017
12,990
13,729
17,296
18,150
75,872
96,227
Multifamily residential mortgages.
1,793
1,758
10,668
10,947
11,245
12,470
33,571
35,784
Commercial RE loans.
23,279
22,665
113,830
122,242
94,754
104,928
202,164
219,471
Construction RE loans.
6,581
7,273
32,578
37,612
30,850
39,896
72,468
88,928
Farmland loans.
10,744
10,341
12,963
13,672
3,549
4,109
5,484
6,147
RE loans from foreign offices.
0
0
47
44
365
324
31,954
34,742
Commercial and industrial loans.
24,681
24,480
88,524
92,286
115,564
123,520
772,157
805,216
Loans to individuals.
19,937
18,383
64,306
59,755
109,312
101,806
363,139
417,561
Credit cards".
754
505
10,559
7,175
48,859
39,067
147,464
169,779
Other revolving credit plans.
na
433
na
2,405
na
4,403
na
19,440
Installment loans.
19,184
17,445
53,748
50,175
60,452
58,336
215,675
228,342
All other loans and leases.
16,755
16,282
25,516
26,146
31,410
34,176
378,499
411,922
Less: Unearned income.
270
187
823
679
613
547
1,546
1,361
'Includes “All other loans” for institutions under $1 billion in asset size.
'Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards" and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 15
Key indicators, FDIC-insured commercial banks by region
First quarter 2001
(Dollar figures in millions)
Northeast
Southeast
Central
Midwest
Southwest
West
Number of institutions reporting.
656
1,420
1,767
2,133
1,365
896
Total employees (FTEs).
517,108
461,960
294,311
128,112
102,280
177,954
Selected income data ($)
Net income.
$6,585
$4,687
$3,075
$1,311
$761
$3,459
Net interest income.
15,674
13,283
9,064
4,022
2,533
7,236
Provision for loan losses.
2,669
1,630
1,304
711
174
1,449
Noninterest income.
17,706
8,357
4,680
2,595
902
5,910
Noninterest expense.
20,876
12,881
8,131
4,084
2,247
6,772
Net operating income.
6,487
4,609
2,921
1,247
733
3,383
Cash dividends declared.
3,850
4,882
1,450
844
448
1,977
Net charge-offs to loan and lease reserve_
2,455
1,503
1,096
610
125
1,178
Selected condition data ($)
Total assets.
2,237,477
1,598,698
1,126,398
414,340
262,527
671,374
Total loans and leases.
1,137,097
1,060,099
765,937
281,263
153,640
430,109
Reserve for losses
21,002
16,119
11,691
4,545
2,163
9,145
Securities.
347,174
248,367
200,625
61,625
68,485
121,698
Other real estate owned.
746
1,059
465
236
241
306
Noncurrent loans and leases.
16,200
12,516
8,378
2,665
1,529
4,803
Total deposits.
1,392,351
1,079,943
745,237
288,041
214,393
463,758
Domestic deposits.
894,741
991,475
685,650
279,229
213,462
448,071
Equity capital.
179,366
143,561
89,874
40,944
25,206
67,289
Off-balance-sheet derivatives.
33,254,871
9,158,631
1,090,818
22,605
5,857
388,850
Performance ratios (annualized %)
Return on equity.
14.88
13.26
13.88
12.99
12.34
21.00
Return on assets.
1.19
1.17
1.10
1.26
1.17
2.09
Net interest income to assets.
2.84
3.31
3.24
3.86
3.90
4.38
Loss provision to assets.
0.48
0.41
0.47
0.68
0.27
0.88
Net operating income to assets.
1.17
1.15
1.04
1.20
1.13
2.05
Noninterest income to assets.
3.21
2.08
1.67
2.49
1.39
3.57
Noninterest expense to assets.
3.78
3.21
2.90
3.92
3.46
4.10
Loss provision to loans and leases.
0.94
0.62
0.68
1.00
0.46
1.36
Net charge-offs to loans and leases.
0.86
0.57
0.58
0.86
0.33
1.11
Loss provision to net charge-offs.
108.72
108.45
119.04
116.44
139.01
123.00
Performance ratios (%)
Percent of institutions unprofitable.
9.60
10.21
6.00
4.13
5.13
10.38
Percent of institutions with earnings gains....
58.38
50.35
53.31
47.77
51.58
59.71
Nonint. income to net operating revenue.
53.04
38.62
34.05
39.21
26.25
44.96
Nonint. expense to net operating revenue_
62.54
59.52
59.16
61.72
65.43
51.51
Condition ratios (%)
Nonperforming assets to assets.
0.77
0.85
0.80
0.70
0.68
0.78
Noncurrent loans to loans.
1.42
1.18
1.09
0.95
1.00
1.12
Loss reserve to noncurrent loans.
129.65
128.79
139.55
170.55
141.46
190.42
Loss reserve to loans.
1.85
1.52
1.53
1.62
1.41
2.13
Equity capital to assets.
8.02
8.98
7.98
9.88
9.60
10.02
Leverage ratio.
7.22
7.66
7.57
8.31
8.64
8.67
Risk-based capital ratio.
12.37
11.89
11.83
12.95
14.04
12.79
Net loans and leases to assets.
49.88
65.30
66.96
66.79
57.70
62.70
Securities to assets.
15.52
15.54
17.81
14.87
26.09
18.13
Appreciation in securities (% of par).
0.56
1.46
0.89
1.48
1.37
1.02
Residential mortgage assets to assets.
15.62
25.57
22.48
19.26
25.01
19.79
Total deposits to assets.
62.23
67.55
66.16
69.52
81.67
69.08
Core deposits to assets.
31.73
53.34
50.82
59.89
66.83
56.50
Volatile liabilities to assets.
47.40
26.39
31.28
22.15
20.03
25.63
16 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Loan performance, FDIC-insured commercial banks by region
First quarter 2001
(Dollar figures in millions)
Northeast
Southeast
Central
Midwest
Southwest
West
All
institutions
Percent of loans past due 30-89 days
Total loans and leases.
1.16
1.12
1.36
1.52
1.42
1.24
1.23
Loans secured by real estate (RE).
1.15
1.31
1.35
1.10
1.29
1.03
1.23
1-4 family residential mortgages.
1.28
1.79
1.61
1.07
1.40
1.23
1.51
Home equity loans.
0.66
0.73
1.16
0.76
0.70
0.88
0.85
Multifamily residential mortgages.
0.33
0.63
0.92
0.83
0.95
0.61
0.64
Commercial RE loans.
0.89
0.76
1.02
0.98
1.07
0.71
0.87
Construction RE loans.
1.16
1.08
1.43
1.26
1.46
1.33
1.24
Commercial and industrial loans*.
0.61
0.63
1.16
1.57
1.42
1.23
0.88
Loans to individuals.
2.47
1.94
1.93
2.24
1.80
1.91
2.15
Credit cards.
2.85
2.62
1.56
2.54
1.44
2.05
2.54
Installment loans and other plans.
2.36
1.83
2.03
2.29
1.87
1.90
2.07
All other loans and leases.
0.67
0.43
1.29
1.95
1.63
0.96
0.87
Percent of loans noncurrent
Total loans and leases.
1.42
1.18
1.09
0.95
1.00
1.12
1.20
Loans secured by real estate (RE).
0.93
0.91
0.98
0.62
0.80
0.67
0.87
1-4 family residential mortgages.
0.86
1.15
1.05
0.50
0.76
0.64
0.95
Home equity loans.
0.31
0.24
0.86
0.33
0.40
0.32
0.44
Multifamily residential mortgages.
0.31
0.39
0.49
0.31
0.33
0.45
0.39
Commercial RE loans.
0.79
0.75
0.96
0.64
0.85
0.68
0.79
Construction RE loans.
1.21
0.78
0.92
1.01
0.73
0.73
0.86
Commercial and industrial loans*.
1.90
2.06
1.60
1.20
1.62
1.82
1.82
Loans to individuals.
2.15
0.85
0.65
1.31
0.61
1.36
1.41
Credit cards.
2.59
1.79
0.95
1.97
1.01
1.88
2.18
Installment loans and other plans.
1.95
0.60
0.64
0.91
0.62
0.53
1.04
All other loans and leases.
0.68
0.75
0.76
1.19
1.17
1.17
0.80
Percent of loans charged-off, net
Total loans and leases.
0.86
0.57
0.58
0.86
0.33
1.11
0.73
Loans secured by real estate (RE).
0.09
0.11
0.17
0.19
0.04
0.06
0.12
1-4 family residential mortgages 0.08
0.10
0.18
0.16
0.04
0.03
0.10
Home equity loans.
0.25
0.26
0.25
0.26
0.24
0.23
0.25
Multifamily residential mortgages.
0.00
0.07
0.05
0.08
0.02
-0.03
0.03
Commercial RE loans.
0.03
0.09
0.15
0.23
0.03
0.10
0.10
Construction RE loans.
0.04
0.15
0.19
0.12
0.03
-0.02
0.11
Commercial and industrial loans*.
0.71
0.97
0.90
1.07
0.66
1.30
0.90
Loans to individuals.
2.94
1.90
1.39
2.70
0.86
3.24
2.43
Credit cards.
4.70
4.15
4.34
4.49
1.93
4.15
4.44
Installment loans and other plans.
1.27
1.18
1.05
1.00
0.82
1.47
1.17
All other loans and leases.
0.19
0.20
0.63
0.37
0.29
1.36
0.38
Loans outstanding ($)
Total loans and leases.
$1,137,097
$1,060,099
$765,937
$281,263
$153,640
$430,109
$3,828,145
Loans secured by real estate (RE).
362,433
549,061
364,317
131,081
84,142
208,351
1,699,384
1-4 family residential mortgages.
191,556
270,963
165,028
57,579
33,067
77,716
795,907
Home equity loans.
26,790
44,134
36,784
7,656
1,360
13,399
130,123
Multifamily residential mortgages.
15,343
16,836
13,464
4,008
2,435
8,874
60,960
Commercial RE loans.
79,154
143,713
103,576
36,717
30,810
75,335
469,305
Construction RE loans.
16,864
63,667
36,844
14,477
12,761
29,097
173,709
Farmland loans.
1,295
6,813
8,594
10,644
3,708
3,215
34,269
RE loans from foreign offices.
31,431
2,937
28
0
0
715
35,111
Commercial and industrial loans.
348,816
273,578
220,421
63,958
37,051
101,679
1,045,503
Loans to individuals.
223,761
130,902
87,555
48,951
23,071
83,264
597,505
Credit cards**.
104,010
29,887
8,018
21,415
693
52,504
216,527
Other revolving credit plans.
11,487
4,807
2,570
3,472
720
3,626
26,680
Installment loans.
108,265
96,209
76,967
24,064
21,658
27,135
354,299
All other loans and leases.
203,256
107,187
93,908
37,321
9,598
37,256
488,527
Less: Unearned income.
1,168
629
264
48
222
443
2,774
'Includes “All other loans" for institutions under $1 billion in asset size.
"Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards” and
“Other revolving credit plans.”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 17
Glossary
Data Sources
Data are from the Federal Financial Institutions Examina¬
tion Council (FFIEC) Reports of Condition and Income
(call reports) submitted by all FDIC-insured, national-
chartered and state-chartered commercial banks and
trust companies in the United States and its territories.
Uninsured banks, savings banks, savings associations,
and U.S. branches and agencies of foreign banks are
excluded from these tables. All data are collected and
presented based on the location of each reporting institu¬
tion’s main office. Reported data may include assets and
liabilities located outside of the reporting institution’s home
state.
The data are stored on and retrieved from the OCC’s In¬
tegrated Banking Information System (IBIS), which is ob¬
tained from the FDIC’s Research Information System (RIS)
database.
Computation Methodology
For performance ratios constructed by dividing an income
statement (flow) item by a balance sheet (stock) item, the
income item for the period was annualized (multiplied by
the number of periods in a year) and divided by the aver¬
age balance sheet item for the period (beginning-of-
period amount plus end-of-period amount plus any interim
periods, divided by the total number of periods). For
“pooling-of-interest” mergers, prior period(s) balance
sheet items of “acquired” institution(s) are included in bal¬
ance sheet averages because the year-to-date income
reported by the “acquirer” includes the year-to-date re¬
sults of “acquired” institutions. No adjustments are made
for “purchase accounting” mergers because the year-to-
date income reported by the “acquirer” does not include
the prior-to-merger results of “acquired” institutions.
Definitions
Commercial real estate loans—loans secured by nonfarm
nonresidential properties.
Construction real estate loans—includes loans for all
property types under construction, as well as loans for
land acquisition and development.
Core deposits—the sum of transaction deposits plus sav¬
ings deposits plus small time deposits (under $100,000).
IBIS—OCC's Integrated Banking Information System.
Leverage ratio—Tier 1 capital divided by adjusted tan¬
gible total assets.
Loans to individuals—includes outstanding credit card
balances and other secured and unsecured installment
loans.
Net charge-offs to loan and lease reserve—total loans
and leases charged off (removed from balance sheet be¬
cause of uncollectibility), less amounts recovered on loans
and leases previously charged off.
Net loans and leases to assets—total loans and leases
net of the reserve for losses.
Net operating income—income excluding discretionary
transactions such as gains (or losses) on the sale of in¬
vestment securities and extraordinary items. Income taxes
subtracted from operating income have been adjusted to
exclude the portion applicable to securities gains (or
losses).
Net operating revenue—the sum of net interest income
plus noninterest income.
Noncurrent loans and leases—the sum of loans and
leases 90 days or more past due plus loans and leases in
nonaccrual status.
Nonperforming assets—the sum of noncurrent loans and
leases plus noncurrent debt securities and other assets
plus other real estate owned.
Number of institutions reporting—the number of institu¬
tions that actually filed a financial report.
Off-balance-sheet derivatives—the notional value of fu¬
tures and forwards, swaps, and options contracts; begin¬
ning March 31, 1995, new reporting detail permits the
exclusion of spot foreign exchange contracts. For March
31, 1984 through December 31, 1985, only foreign ex¬
change futures and forwards contracts were reported; be¬
ginning March 31, 1986, interest rate swaps contracts
were reported; beginning March 31, 1990, banks began
to report interest rate and other futures and forwards con¬
tracts, foreign exchange and other swaps contracts, and
all types of option contracts.
Other real estate owned—primarily foreclosed property.
Direct and indirect investments in real estate ventures are
excluded. The amount is reflected net of valuation allow¬
ances.
18 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Percent of institutions unprofitable—the percent of institu¬
tions with negative net income for the respective period.
Percent of institutions with earnings gains—the percent of
institutions that increased their net income (or decreased
their losses) compared to the same period a year earlier.
Reserve for losses—the sum of the allowance for loan
and lease losses plus the allocated transfer risk reserve.
Residential mortgage assets—the sum of 1-4 family resi¬
dential mortgages plus mortgage-backed securities.
Return on assets (ROA)—net income (including gains or
losses on securities and extraordinary items) as a per¬
centage of average total assets.
Return on equity (ROE)—net income (including gains or
losses on securities and extraordinary items) as a per¬
centage of average total equity capital.
Risk-based capital ratio—total capital divided by risk
weighted assets.
Risk-weighted assets—assets adjusted for risk-based
capital definitions which include on-balance-sheet as well
as off-balance-sheet items multiplied by risk weights that
range from zero to 100 percent.
Securities—excludes securities held in trading accounts.
Effective March 31, 1994 with the full implementation of
Financial Accounting Standard (FAS) 115, securities clas¬
sified by banks as “held-to-maturity" are reported at their
amortized cost, and securities classified a “available-for-
sale” are reported at their current fair (market) values.
Securities gains (losses)—net pre-tax realized gains
(losses) on held-to-maturity and available-for-sale securi¬
ties.
Total capital—the sum of Tier 1 and Tier 2 capital. Tier 1
capital consists of common equity capital plus noncumu-
lative perpetual preferred stock plus minority interest in
consolidated subsidiaries less goodwill and other ineli¬
gible intangible assets. Tier 2 capital consists of subordi¬
nated debt plus intermediate-term preferred stock plus
cumulative long-term preferred stock plus a portion of a
bank's allowance for loan and lease losses. The amount
of eligible intangibles (including mortgage servicing
rights) included in Tier 1 capital and the amount of the
allowance included in Tier 2 capital are limited in accor¬
dance with supervisory capital regulations.
Volatile liabilities—the sum of large-denomination time de¬
posits plus foreign-office deposits plus federal funds pur¬
chased plus securities sold under agreements to repur¬
chase plus other borrowings. Beginning March 31, 1994,
new reporting detail permits the exclusion of other bor¬
rowed money with original maturity of more than one year;
previously, all other borrowed money was included. Also
beginning March 31, 1994, the newly reported “trading
liabilities less revaluation losses on assets held in trading
accounts” is included.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 19
Recent Corporate Decisions
The OCC publishes monthly, in its publication Interpreta¬
tions and Actions, corporate decisions that represent a
new or changed policy, or present issues of general inter¬
est to the public or the banking industry. In addition, sum¬
maries of selected corporate decisions appear in each
issue of the Quarterly Journal. In the first quarter of 2001,
the following corporate decisions were of particular impor¬
tance because they were precedent setting or otherwise
represented issues of importance. The OCC's decision
documents for these decisions may be found in Interpre¬
tations and Actions using the decision number at the end
of each summary.
Charters
On March 1, 2001, the OCC granted preliminary condi¬
tional approval for Goldman Sachs Group Inc., a global
investment banking and securities firm, to establish Gold¬
man Sachs Trust Company, N.A., New York City, New
York. The bank will serve primarily high-net-worth individu¬
als nationwide. The bank also plans to operate a trust
office in Wilmington, Delaware. As a condition of approval,
Goldman Sachs Group will enter into a written agreement
with the bank setting forth its obligations to provide capital
assurance and liquidity maintenance to the bank, if and
when necessary. [Conditional Approval No. 455]
On March 23, 2001, the OCC granted final conditional
approval for Cabela's Inc., a sporting goods retailer, to
establish World's Foremost Bank, N.A., Sidney, Nebraska
(bank), as a credit card bank. The approval is subject to
the condition that any contract between the parent, or any
affiliate, and the bank concerning the purchase of receiv¬
ables from the bank may not contain any provision en¬
abling the parent or affiliate to terminate the contract upon
an event of bankruptcy by the parent or any affiliate. In
addition, as a condition of approval, Cabela's Inc. entered
into a written agreement with the bank setting forth
Cabela's obligations to provide capital assurance and li¬
quidity maintenance to the bank, if and when necessary.
[Conditional Approval No. 459]
Conversion
On March 15, 2001, the OCC granted conditional ap¬
proval for Rushmore Trust and Savings Bank, FSB, to con¬
vert to a national bank. Immediately following conversion,
the bank was acquired by Friedman, Billings, Ramsey
Group, Inc., Arlington, Virginia, an investment banking
and asset management firm. The condition of approval
requires the bank to provide at least 60 days prior ad¬
vance notice and receive the OCC's prior approval before
any significant deviation or change from the proposed
operating plan during the bank's first three years of opera¬
tion. [Conditional Approval No. 457]
Operating Subsidiary
On March 10, 2001, the OCC granted conditional ap¬
proval for Wachovia Bank, N.A., Winston-Salem, North
Carolina to establish an operating subsidiary that will hold
a noncontrolling interest in a corporation that is a licensed
professional employer organization. Wachovia will market
human resource and employee-related administrative ser¬
vices to small- and medium-sized customers. The ap¬
proval is subject to the standard conditions for
noncontrolling investments. [Conditional Approval No.
456]
Community Reinvestment Act Decisions
On February 12, 2001, the OCC granted conditional ap¬
proval for Fleet National Bank, Providence, Rhode Island,
to acquire Summit Bank, Hackensack, New Jersey; Sum¬
mit Bank, Norwalk, Connecticut; and Summit Bank,
Bethlehem, Pennsylvania. Two community organizations
expressed concerns with the banks' records of Commu¬
nity Reinvestment Act (CRA) performance and with the
potential effects of the merger on the convenience and
needs of the communities to be served. The OCC’s inves¬
tigation of those concerns disclosed no information that
was inconsistent with approval under the Community Re¬
investment Act. The conditions of approval were unrelated
to the comments or CRA. [Conditional Approval No. 454]
On February 15, 2001, the OCC granted approval for
Wells Fargo Bank New Mexico, N.A., Albuquerque, New
Mexico, to purchase 29 branches of First Security Bank of
New Mexico, N.A., Albuquerque, New Mexico. The OCC
considered comments received from a community organi¬
zation in August 2000, during the comment period for the
proposed merger of Wells Fargo & Company and First
Security Corporation. The commenter expressed con¬
cerns that Wells Fargo New Mexico, N.A.'s record re¬
flected a low level of lending to Hispanics and a low level
of home lending to low- and moderate-income borrowers.
The OCC's investigation of those concerns disclosed no
Quarterly J ournal, Vol. 20, No. 2, J une 2001 21
information that was inconsistent with approval under the
Community Reinvestment Act. [CRA Decision No. 108]
On March 13, 2001, the OCC granted approval to Chase
Manhattan Bank USA, N.A., Wilmington, Delaware, to ac¬
quire First USA Financial Services, Inc., Salt Lake City,
Utah. One community organization expressed concerns
with First USA's Financial Services, Inc.'s “needs to im¬
prove' CRA rating and with certain Flome Mortgage Dis¬
closure Act data of Chase Manhattan Bank USA, N.A. The
OCC's investigation of those concerns disclosed no infor¬
mation that was inconsistent with approval under the
Community Reinvestment Act. [Corporate Decision No.
2001-06]
22 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Speeches and Congressional Testimony
Page
Of the Comptroller of the Currency
Remarks by John D. Hawke Jr., Comptroller of the Currency, before an International Monetary Seminar, on
Internet banking, Paris, France, February 5, 2001 ..25
Remarks by John D. Hawke Jr, Comptroller of the Currency, before a Conference on Financial E-Commerce,
sponsored by the Federal Reserve Bank of New York, on Internet banking, New York, New York,
February 23, 2001 . 28
Remarks by John D. Hawke Jr, Comptroller of the Currency, before the National Association of Affordable
Housing Lenders, on community development bankers, Washington, D.C., March 1,2001 ..32
Remarks by John D. Hawke Jr., Comptroller of the Currency, before the Institute of International Bankers, on
Internet banking, Washington, D.C., March 5, 2001 . 35
Remarks by John D. Hawke Jr., Comptroller of the Currency, before the National Community Reinvestment
Coalition, on electronic transfer accounts for the unbanked, Washington, D.C., March 6, 2001 . 39
Remarks by John D. Hawke Jr., Comptroller of the Currency, before the Independent Community Bankers of
America, on risk management, Las Vegas, Nevada, March 8, 2001 . 42
Of the First Senior Deputy Comptroller and Chief Counsel
Statement of Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel, Office of the Comptroller
of the Currency, before the U.S. House Subcommittees on General Oversight and Investigations and on
Financial Institutions and Consumer Credit, Committee on Financial Services, on coordination and
information sharing among financial institution regulators, Washington, D.C., March 6, 2001 . .45
Quarterly J ournal, Vol. 20, No. 2, J une 2001 23
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before an
International Monetary Seminar, on Internet banking, Paris, France,
February 5, 2001
In the early 1930s, the American humorist Will Rogers
would solemnly tell his audience that there had been
“three great inventions since the beginning of time: fire—
the wheel—and central banking.” That usually brought a
big laugh. A decade earlier, when central banking was
young in many countries—including mine—central bank¬
ers were hailed as soldiers of peace, international coop¬
eration, and financial stability. But by the 1930s, those
same central bankers were held in widespread contempt
for passivity or complicity—or both—in the events that led
to the Great Depression. By then, many central banks had
been transformed—not always against their will—into in¬
struments of economic nationalism and international ri¬
valry that would soon plunge the world into war. Not until
well after the restoration of peace did the central banks of
the world reclaim the optimistic vision of that earlier age.
Today Rogers’ “three great inventions” would be regarded
as nothing more than an exaggeration to make a valid
point, and that's a tribute to the extraordinarily important
role that central bankers play in ensuring a sound global
economy. In times of political turmoil, the world can count
on its central banks as anchors of calm and stability. Ev¬
eryone may not appreciate it, but I know of no other insti¬
tutions, public or private, that do more to advance the
development of sound economies, high standards of liv¬
ing, and the dignity of all the world's people.
From the beginning, it was understood that the goals of
central banking could be best advanced through con¬
certed action among central bankers. The formation of the
Bank for International Settlements (BIS) in 1930 was an
important step in this direction. Today, as you know, we
have a variety of mechanisms through which central
bankers can draw on each other’s expertise to address
the pressing financial issues that confront us.
From the perspective of bank supervisors, the establish¬
ment of the Basel Committee on Bank Supervision in 1974
was an event of scarcely less significance than the cre¬
ation of the BIS itself. The committee was formed in re¬
sponse to the growing internationalization and
interdependence of the world's financial markets—a trend
that lends even greater urgency to its work today. Under
its auspices, great progress has been made in improving
supervisory understanding and the quality of bank super¬
vision worldwide.
The committee pursues these goals in three principal
ways: by improving the effectiveness of techniques for
supervising international banking; by exchanging informa¬
tion on national supervisory arrangements; and by setting
minimum supervisory standards in areas where they are
considered desirable. In recent years, the committee has
actively expanded its links with supervisors in nonmember
countries, with a view to strengthening prudential supervi¬
sory standards in all the major markets.
Initially, the Basel Committee’s posture was primarily reac¬
tive; its goal was to ensure a coordinated response to the
spillover effects of multinational bank failures. Today, in
keeping with modern supervisory theory, it aims to avert
crisis. Thus, the committee focuses on studying risk man¬
agement, disseminating its principles among bankers and
bank supervisors, and identifying areas of rising and
emerging risk so that national supervisors can take early
and effective action.
The best—and best-known—example of the committee's
response to risk is its continuing work on capital stan¬
dards. The committee was persuaded to tackle the sub¬
ject back in early 1980s not only by the erosion in the
capital ratios of major international banks, but also by
cross-border concerns—that capital requirements in some
countries were being manipulated to lend a competitive
advantage to banking organizations located in those
countries. The landmark Capital Accord of 1988 ad¬
dressed many of these concerns. Since then, the Accord
has been frequently updated and amplified, with the most
recent proposals for revisions having come just last
month. But though much has changed, the fundamental
principles embodied in the original Accord—that supervi¬
sory standards regarding capital should be harmonized
around the world and that all internationally active banks
in the G-10 countries should meet certain minimum
requirements—have been repeatedly reaffirmed.
In some ways, electronic banking—e-banking, for our
purposes—epitomizes the supervisory challenge that the
Basel Committee was created to address. The technology
on which it is based is inherently transnational. One of its
very purposes is to give the banks that employ it the
ability to offer products and services to customers wher¬
ever they might be located, without regard to national bor¬
ders. The issue that's presented for supervisors and
policy makers is how such offerings can or should be
regulated in this transnational environment. It should be
obvious that if every jurisdiction into which an e-banking
offering was broadcast attempted to regulate the offering,
or the offerer, the major benefit of the new technology
Quarterly J ournal, Vol. 20, No. 2, J une 2001 25
could very quickly be lost. One is tempted to say that if no
mechanism existed for coordinating bank supervision in¬
ternationally, one would have to be invented to deal with
the challenge that e-banking presents.
Although e-banking was an exceedingly negligible pres¬
ence in the overall financial marketplace in 1998, the fun¬
damental characteristics I've just mentioned, as well as a
recognition of its future promise, led the Basel Committee
to conduct a preliminary study of its risk management
implications. That study demonstrated a clear need for
more work in the area, and the mission was entrusted to a
group formed for the purpose, the Electronic Banking
Group, or EBG, which it's my honor to head. The EBG
membership comprises 17 central banks and bank super¬
visory agencies from the G-10, along with observers rep¬
resenting the European Central Bank, the European
Commission, and, most recently, bank supervisors from
Australia, Hong Kong, and Singapore.
One of the EBG’s first orders of business was to inventory
and assess the major risks associated with e-banking.
Those risks, we concluded, fall into six broad risk catego¬
ries: strategic risk; legal risk; operational risk; country risk;
reputational risk; and, finally, credit, market, and liquidity
risk. Let me elaborate briefly on each.
E-banking is undergoing constant and rapid change, and
this intensifies strategic risk for many banking organiza¬
tions. Historically, banks would gradually roll out new
products and services only after in-depth testing. Today,
however, banks face competitive pressures to introduce
new e-banking applications in very compressed time
frames—often no more than a few months from concept to
production. It's the responsibility of bank directors and
bank managers to ensure that adequate strategic review
has been conducted before the activity commences.
As I've already noted, e-banking gives financial institu¬
tions unprecedented ability to serve customers across na¬
tional borders. But in reaching out to these customers,
banks also face unprecedented complexities arising from
differences in legal and regulatory environments, includ¬
ing different consumer protection laws, record-keeping
and reporting requirements, privacy rules, and money¬
laundering laws. E-banking institutions—and their primary
regulators—have to find ways to effectively manage these
legal risks.
Verifying the legitimacy of customer communications,
transactions, and access requests is an essential part of
the e-banking business. Banks must therefore build ad¬
equate authentication capabilities into their electronic sys¬
tems. Failure to authenticate e-banking users can expose
a bank to operational risk, fraud, or unknowing involve¬
ment in criminal activity.
In an effort to bring e-banking products rapidly to market,
many institutions that lack the in-house technology base
to do so on their own have formed partnerships with other
financial institutions and technology vendors both inside
and outside their home countries. While these partner¬
ships are often successful, banks must be aware of the
possibility of increased operational risk that could result
from the loss of risk management and control. It’s critical
that banks conduct comprehensive and ongoing over¬
sight of all outsourced and third-party dependencies that
could have a material impact on its operations.
Any firm, financial or otherwise, doing business abroad
faces country risks associated with unforeseeable
changes in the economic, social, or political climate that
could disrupt service. Different compliance and regulatory
requirements, labor unrest, political instability, and cur¬
rency fluctuations are just a few of the country risks that
cross-border e-banking poses.
Reputational risk refers to the damage that can occur
when a bank is unable to deliver on its service commit¬
ments. This can include failing to adequately meet cus¬
tomer account needs or expectations, unreliable or
inefficient delivery systems, untimely responses to cus¬
tomer inquiries, or violations of customer privacy.
Finally, there are the credit, market, and liquidity risks
associated with rapid expansion through electronic chan¬
nels into new markets; with making loans over the Internet
to applicants whose credit history may be reported in un¬
familiar ways or not at all; and with the potential for
greater funding volatility related to reliance on price-
sensitive deposits obtained through the Internet.
It should be noted that none of these risks are unique to
e-banking. They apply to all banking organizations, and
each has been addressed in previous risk management
initiatives of the Basel Committee. But these risks are all
magnified in a technology-intensive environment.
The EBG’s catalogue of e-banking risks—and the all-
important question of how bankers and bank supervisors
might best respond to those risks—have largely defined
the EBG's agenda over the past year. It's been a year of
intensive research and study. We initiated an ambitious
outreach and communication program with prominent pri¬
vate sector institutions active in e-banking developments
and activities, including financial institutions, third-party
service providers, and vendors. A series of Industry
Roundtables, held in North America, Europe, and Asia,
have allowed the EBG to obtain invaluable insight and
information regarding e-banking risk issues, current stra¬
tegic and product developments, and emerging risk man¬
agement standards. It's been a lively and productive year.
26 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Now, after digesting all that we've learned, the EBG has
prepared a report entitled “Principles for Risk Manage¬
ment of Electronic Banking,” which is in final draft and will
be released for comment later this month. The theme of
the report is that e-banking should be conducted with no
less attention to the fundamentals of safety and sound¬
ness than banking activities conducted through traditional
delivery channels. Our report presents 14 risk manage¬
ment principles, organized under three headings: Board
and Management Oversight; Security Controls; and Legal
and Reputational Risk Management.
In preparing this guidance, we have tried to be as spe¬
cific as possible in alerting financial institutions and their
supervisors to the nature of the risks they face in the
e-banking environment and in suggesting sound prac¬
tices to manage these risks. But we have also been mind¬
ful of the fact that each e-banking situation is different and
may require its own customized approach to risk mitiga¬
tion. Our expectation is that bankers will put these prin¬
ciples to use as they develop policies and procedures to
govern their e-banking activities.
This expectation is embodied in principle number one.
Permit me to read it verbatim: “The Board of Directors
and/or senior management should establish effective
management oversight over the risks associated with
e-banking activities, including the establishment of spe¬
cific accountabilities, policies, and controls to manage
those risks. In addition, e-banking risk management
should be integrated within the institution’s overall risk
management process.”
I should tell you that it was no accident that this particular
principle wound up at the top of our list. After all is said
and done, management recognition of the risks inherent in
e-banking and support for a supportive risk management
environment is fundamental if the specific risks that are
addressed in the other 13 principles are to be properly
controlled.
While this report should be very useful to financial institu¬
tions “going electronic,” the manner in which the study
was prepared—and in which current EBG initiatives are
being conducted—may prove to be just as auspicious a
development for the future of e-banking. Experience
teaches us that achieving the right kind of international
consensus can be a painstaking and time-consuming
process. The pace of developments in e-banking has re¬
quired the EBG to bring our work to the attention of the
banking community in a timely way, without compromising
the breadth and depth of the consultation and outreach
that has gone into it. I’m proud of the way that the group
and our staff have met this challenge.
We shall continue to consult methodically with the indus¬
try, with our supervisory counterparts, and with other inter¬
ested parties as the EBG continues to explore the
ramifications of e-banking. Having developed risk man¬
agement principles for e-bankers, we are now hard at
work on guiding principles for cross-border cooperation
among bank supervisors. We know that if e-banking is to
proceed relatively unimpeded and to deliver the benefits
we anticipate, host country supervisors will need to
achieve a high level of comfort with home country super¬
vision. The alternative, new laws and regulations govern¬
ing e-banking in each country in which it is conducted,
would impose a heavy burden on innovation. The goal of
the EBG's ongoing work in this area is to avoid such an
outcome and allow e-banking’s promise to be fulfilled in a
safe and sound manner.
In keeping with this emphasis on consultation, I would like
to conclude my remarks by reporting to you on another
promising initiative. Last year, I had the pleasure of partici¬
pating in a meeting with our colleague, Mr. Andrew
Crockett, chairman of the Financial Stability Forum, to dis¬
cuss how the broad community of financial supervisors,
including the insurance and securities regulators, might
exchange information on e-finance activities within their
respective spheres. It was agreed that we would set up
an informal Contact Group for E-Finance, which would
facilitate the exchange of information across the various
financial sectors and promote discussion of the possible
systemic implications of e-finance activities. Andrew
asked me to chair this group. Our aim is not to duplicate
work under way in the EBG or its counterparts in any
other organization, but simply to share information and
continue the process of consultation and coordination that
is so necessary and that has already been so fruitful. It
was in that spirit that I wanted to share my thoughts with
you this evening.
Will Rogers, whom I quoted at the outset of these re¬
marks, had no more use for after-dinner speakers than he
had for bankers. He called them “the two most nonessen¬
tial industries we have.” The thought of a banker—or a
bank supervisor—doubling as an after-dinner speaker
would surely have filled him with dread. I have tried this
evening to do nothing that would have justified his appre¬
hension, and I appreciate your bearing with me in this
effort.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 27
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before a
Conference on financial e-commerce, sponsored by the Federal Reserve
Bank of New York, on Internet banking, February 23, 2001, New York,
New York
Among the many things technology has changed are the
ways we think and talk about technology itself. The term
“electronic banking,” for example, once referred to ATMs
and direct deposit. Today, it generally means banking
online, through the personal computer and over the
Internet. That's the brave new world of banking in the 21st
century—and one of the key subjects of this timely confer¬
ence.
It's taken a fair amount of self-discipline not to get swept
up in the e-banking enthusiasms of recent years. It seems
only yesterday that the conventional wisdom held that
bankers who were unable to offer customers a full range
of products and services over the Internet might as well
turn in their charters. In fact, some analysts argued that, in
order to take full advantage of the new medium, banks
would have to develop Internet banking apart from tradi¬
tional banking operations. It was expected that the
Internet's low operating costs, compared to the large
costs associated with maintaining branches, would allow
banks to charge lower fees and offer higher deposit rates.
The Internet would provide the convenience of banking
wherever and whenever the customer chose to use the
service. And the ability to gather and process valuable
customer information over the Internet would allow
Internet-savvy bankers to tailor and market services to
individual customer demands and to respond rapidly to
changing market circumstances.
Yet, so far, the evidence has not supported the prediction
that banks with traditional branch networks would be un¬
able to compete successfully with more agile Internet-
focused banks. The most successful Internet banking
operations have been those that operate as part of an
existing traditional bank, while Internet-only banks have
been having difficulty growing and generating profits. In¬
creasingly, industry analysts have begun to question the
case for a pure Internet strategy.
Of course, we should always be cautious about drawing
sweeping conclusions about events that are still unfold¬
ing. We're very much in the early stages of Internet bank¬
ing, and confident pronouncements of what the future
holds should be treated with skepticism. Nevertheless, I
think it is worth reflecting on recent market developments
and how, as regulators, we should react to these develop¬
ments. In that spirit I want to address several questions
today:
• What has the Internet's impact actually been on the
banking industry so far?
• Where will it take the industry in the near future?
• What special risks—individually or in combination—
does e-banking present to a safe and sound banking
system?
Some of these questions are impossible to answer with
any precision, and the hazards of the crystal ball are well
known. But, with all the appropriate cautions and caveats,
I will venture a few educated guesses on the impact of the
Internet on the banking industry and discuss my views on
how we should approach regulatory policy and supervi¬
sion given the large uncertainties as to future develop¬
ments.
A Status Report on Internet
Banking—and Some Musings on the
F uture
In discussing Internet banking, we should begin by differ¬
entiating between pure Internet startups, on the one hand,
and traditional banks that have embraced the Internet as
an additional delivery channel, on the other. Popular im¬
pressions to the contrary, only about two dozen banks
and thrifts operate as Internet-only (or Internet-mainly) in¬
stitutions. Of that group, five are national banks chartered
and supervised by the OCC. At the end of the third quar¬
ter of last year, those five banks held assets totaling $1.4
billion—a drop in the bucket, relatively speaking. As I've
already mentioned, these primarily Internet banks have
not yet made significant inroads into the markets of tradi¬
tional banking organizations, and, generally they are find¬
ing it challenging to generate profits and growth.
What kinds of obstacles have pure Internet banks en¬
countered? Customer concerns about online security and
privacy, unfriendly Web sites, unresponsive customer ser¬
vice, and the simple fact that you can't deposit or cash a
check online—all of these have been impediments to the
success of an Internet-only strategy. Another important
factor is the enormous promotional cost of building a cus¬
tomer base to critical mass from scratch—particularly
when traditional banking services work extremely well and
are relatively inexpensive for most consumers. This may
explain the very high percentage of newly opened
Internet banking accounts that lie fallow. By one estimate,
28 Quarterly J ournal, Vol. 20, No. 2, J une 2001
in 1999 nearly 50 percent of all banking accounts opened
with Internet startups were inactive.
As a result, some Internet-primarily operators are now re¬
trenching, adopting cost-saving measures and shedding
customers who add nothing to the bottom line. Fees are
rising, premiums are shrinking, and the attraction—along
with the rationale—for Internet-primarily banking seems
less and less obvious.
While it's clear that to date Internet banking has not over¬
whelmed traditional banking, this should not be inter¬
preted to mean that Internet banking is a bust. In fact,
Internet banking has become an important factor in the
industry over a very short time. For any number of rea¬
sons, many banks and virtually all of the biggest banks
have an Internet presence and others are coming to the
same conclusion almost every day. As 2001 began, 37
percent of all national banks were offering transactional
online banking—nearly twice as many as were offering it
only 15 months earlier. Today, most of the very large insti¬
tutions offer Internet banking, with OCC economists esti¬
mating that approximately 90 percent of all customers
currently bank at institutions offering Internet banking.
That's to say that while it is estimated that only about 13
percent of U.S. households currently use the Internet to
bank, a very large percentage of banking customers
could easily do so if they believed that the service was
superior to traditional channels.
We need to remind ourselves that the Internet banking
“era" has really just begun. As recently as 1997, only
about 100 banks and thrifts offered banking over the
Internet. Since then, as I’ve mentioned, the rate at which
banks have “gone online” has been rapid, especially
compared to the early phases of other technology-based
banking services such as automated teller machines. Fur¬
ther, many banks, including some of the nation’s largest
institutions, see the development of online services as a
major component of their business and marketing strate¬
gies. These institutions are investing very significant re¬
sources in upgrading their technological capabilities and
in acquiring the human resources to effectively utilize
those capabilities.
Interestingly, we're finding a strong generational correla¬
tion among Internet banking users. It's perhaps to be ex¬
pected that Internet banking would appeal to younger
people who have grown up around computers. What one
might not expect is that older folks and retirees would be
among the most enthusiastic customers for e-banking ser¬
vices. Yet surveys show that the older generation is
spending more time with the Internet and e-mail, and is
increasingly comfortable with the idea of conducting fi¬
nancial transactions online. Many of these people are less
mobile than they once were, and they welcome the oppor¬
tunity to pay bills, transfer funds, and monitor their ac¬
counts from the comfort and safety of home.
It's the middle-age folks—people who have grown up with
conventional banking—who have been least inclined to
make the switch so far. They don’t necessarily see the
Internet as offering them significant new value. Indeed, as
I've already argued, the cost savings that middle-income
consumers can expect to receive when performing basic
banking services over the Internet are unlikely to be very
large. This suggests that any breakthrough in consumer
usage of online banking may depend on the development
of new and better services, rather than on reductions in
the price of standard banking products.
On the other hand, even relatively modest transaction cost
reductions will be very attractive to business customers
that handle a large volume of payments and receipts.
Thus, there is a compelling economic case for significant
growth in demand for Internet banking services by banks'
business customers, and to the extent this demand
grows, banks that remain on the sidelines may risk losing
business customers to competitors with more aggressive
Internet strategies.
The impact of the Internet on the banking industry is not
simply a question of how many bank customers will check
balances, transfer funds, and pay bills via the Internet.
Fundamentally, the business of banking involves the col¬
lection, storage, transfer, and processing of information
assets, and the Internet is an incredibly powerful and effi¬
cient tool for handling these processes. It is impossible to
predict precisely all the ways in which this tool will be
used for banks and their customers. But it is possible to
say with confidence that eventually the Internet will
change the nature of banking services.
We can already see changes taking place. Traditionally,
small, start-up firms, for which little information is available
to evaluate creditworthiness, are unable to secure financ¬
ing from formal credit markets, including banking. Often
entrepreneurs have to seek funds from relatives, friends,
or private credit markets. Technological advances in data
collection, data management, and financial engineering
have improved the ability of potential creditors to assess
the creditworthiness of these borrowers and to price the
risks associated with them. As a result, the range of busi¬
nesses that can obtain loans through financial institutions
is expanding rapidly.
Another example of how the Internet can fundamentally
change the business of banking is illustrated by its impact
on the “finder” function of banks. Banks have traditionally
brought together parties who then negotiate and complete
transactions between themselves. In the past, because of
limitations on communications and information technology,
Quarterly J ournal, Vol. 20, No. 2, J une 2001 29
this “finder” function was of limited utility. However, with
the development of the Internet, the finder function em¬
powers banks to play a central role in electronic com¬
merce. The OCC recognized this important development
in our Fleet decision, which concluded that national banks
can act as finders to offer commercially enabled Web site
hosting services to their merchant customers. The bank-
hosted sites serve to bring together buyers and sellers-a
technologically advanced expression of the finder func¬
tion.
The Challenges for Regulators
Regulators have an important role to play in the new world
of Internet banking—a role that goes well beyond deter¬
mining whether a particular online banking activity is per¬
missible under existing law. We're also responsible for
ensuring that both the novel and more generic risks asso¬
ciated with Internet banking are properly understood and
managed by the bankers we supervise, and properly pro¬
vided for in our supervisory policies and practices.
Regulation can be a powerful spur to innovation—or a
formidable obstacle. In the case of the OCC, we have
long taken the view—going back to the days of the first
electric adding machines—that technology is a positive
force capable of delivering significant benefits to banks
and their customers. That's the conviction from which our
policies flow—and not just those relating to Internet bank¬
ing. Our aim is to encourage innovation rather than stifle
it, and while circumstances may occasionally force the
adoption of new rules and restrictions, we believe that
regulatory self-restraint is most likely to produce the best
results for all concerned.
There are several ways in which the development of
Internet banking generates potential challenges for regu¬
latory policy. First, Internet banking—and developing
technology more generally—is changing the structure and
function of financial institutions. Our existing regulatory
framework has evolved as a series of specialized re¬
sponses to the rise of specialized types of financial insti¬
tutions, but technology, among other factors, is rapidly
blurring these differences. Second, Internet banking may
raise either new public policy concerns or cast existing
concerns in a new light—the privacy issue, for example.
Third, Internet banking challenges traditional methods of
safety and soundness supervision by changing the nature
and scope of existing risks, and possibly by creating new
risks. Finally, the nature and scope of technological
change may require authorities to rebalance their empha¬
ses on regulatory rules and industry discretion.
Technology makes it increasingly desirable and easy for
some institutions to offer a wider range of services. Im¬
provements in the ability to integrate financial products
and to more efficiently market and cross-sell are major
advantages of the online environment. But the wider the
range of services offered by banks, the more intricate
becomes the task of identifying which lines of business
banks are engaged in, and the more difficult it becomes
to coordinate supervision among functional supervisors.
Yet regulation also has a prophylactic function. Innovation
is inherently risky, and it's the responsibility of regulators
to help bankers manage that risk and preserve the safety
and soundness of the banking system as a whole.
Internet banking involves some of the same risks that are
common to all bank activities. Avoidance of credit con¬
centrations, funds management, capital adequacy, contin¬
gency planning, internal controls—the rudiments of good
banking practice apply with equal force whether banks
operate online or not. And I can assure you that our su¬
pervision expects no less rigor in minding these funda¬
mentals from those that do.
But it's also important to recognize that Internet banking
involves additional risks—risks novel in kind or degree.
Three areas seem especially relevant to Internet banking.
The first of these is security. So far, only a handful of
financial institutions have reported being victimized by
online security violations. But as electronic banking be¬
comes more widespread and complex, the need for
banks to assess and manage security risks will become
ever more crucial. Risks and threats in the digital world
appear to mirror those of the physical world, but the fast
pace of the Internet magnifies those risks. Consider a
transactional fraud that by itself offers a minimal pay-off.
Once this fraud is automated and repeated over the
course of a day, for perhaps tens of thousands of ac¬
counts, it can provide an attractive incentive for criminals.
We also need to consider how new products and ser¬
vices, such as account aggregation, may increase risk by
centralizing information, thereby creating a richer target
for attackers.
Vendor management is another particular concern for
Internet banks, many of which rely on third-party service
providers for advanced technology. Such relationships en¬
able small banks to offer Internet banking to their custom¬
ers, and can reduce cost burdens even for the largest
banks. But this specialization and division of labor raises
risk management issues. A handful of big service provid¬
ers dominate the field, and if any of them were to experi¬
ence problems, a large number of banks could be
affected. Banks must therefore negotiate contracts that
clearly identify bank and vendor responsibilities for ad¬
dressing risks. Banks must also establish procedures to
effectively monitor vendor compliance within these
terms—and develop contingency plans in the event that a
30 Quarterly J ournal, Vol. 20, No. 2, J une 2001
vendor goes down. This can be especially important for
vendors that are new and relatively untested in the mar¬
ketplace, and for vendors that operate in industries less
regulated than banking.
The final area of supervisory concern centers on the
cross-border implications of e-banking. By its very nature,
Internet banking defies geographic boundaries. Banks in
one national jurisdiction can transact banking business
with customers in other countries, without ever establish¬
ing a physical presence there. Indeed, once a bank goes
on the Internet to offer its products and services, it cannot
limit the geographic reach of that offering. Important
questions are likely to be raised about which country's
supervisors have jurisdiction over remotely conducted
cross-border offerings and transactions, and which laws
within each country apply. In addition, some banks and
service providers may choose to operate from countries in
which the activities are unregulated or less regulated. Risk
exposures to, and competition with, such entities may be¬
come increasingly important for banks of all sizes.
An additional broad policy consideration is determining
when to establish formal rules and when to allow financial
institutions to develop their own nonregulatory ap¬
proaches to managing new risks. Rapid changes in tech¬
nology can render supervisory policies obsolete before
they’ve even been implemented. Moreover, regulatory and
supervisory policies could retard or distort desirable mar¬
ket developments. At the same time, relying on industry
discretion poses risks of its own, and supervisors must
carefully monitor industry behavior to ensure the contin¬
ued protection of the public interest.
Having identified these areas of risk for Internet banks, it
may well be asked what the OCC is doing to respond to
them. The first thing we're doing, of course, is talking
about them, here and at other forums around the country
and around the world. Awareness of a problem is a first
step toward dealing with it, and we want financial institu¬
tions to ask the right questions early on in the Internet
planning process.
To further assist in that effort, we've dedicated significant
resources to the analysis of current and future e-banking
trends. OCC economists and technical experts have been
conducting extensive research in this area. Our examiners
are undergoing extensive training to help them identify
problems relating to banks' online activities, and we regu¬
larly poll them to report on Internet activities in the banks
they supervise. These data are the foundation for OCC's
supervisory guidance.
For example, we are about to release an OCC bulletin that
suggests ways to manage the specific risks associated
with account aggregation. We will offer guidance on how
banks involved in aggregation can avoid such business
catastrophes as system intrusions and denial of service
situations; how they should structure contracts with third-
party providers; and how they can develop effective strat¬
egies to ensure that their activities in this area comply with
all the relevant law, including the privacy provisions of the
Gramm-Leach-Bliley Act. This guidance document and
much else of value to the e-banking community are avail¬
able on the OCC's Internet banking Web site.
Much of the guidance we release is the outgrowth of our
comprehensive collaboration with other domestic and for¬
eign bank supervisors. Late last year, the OCC, as a
member of the Federal Financial Institutions Examination
Council, or FFIEC, released guidance that should be of
real assistance to banks involved in relationships with
third-party technology vendors, and, in cooperation with
the other FFIEC agencies, we recently issued final guide¬
lines for safeguarding customer information. The guide¬
lines address the “security” side of the privacy issue.
Existing mechanisms for coordinating bank supervision in¬
ternationally have also been mobilized successfully to ad¬
dress cross-border e-banking issues. The Basel
Committee on Bank Supervision has taken the lead in this
area through the creation of its Electronic Banking Group,
(EBG) which it’s my honor to chair. The EBG, whose mem¬
bers represent 17 central banks and bank supervisory
agencies—including the Federal Reserve Board, the
FDIC, and the Federal Reserve Bank of New York—has
been highly productive. We have conducted industry fo¬
rums around the world and we are currently putting the
final touches on a paper that provides guidance to banks
on the management of risks associated with e-banking.
We are also in the process of developing an issues paper
addressing some of the challenges involved in the super¬
vision of cross-border e-banking.
In light of the developments I've discussed, in the industry
and in the regulatory community, I believe that the best
days for e-banking lie ahead. Over the next five years or
so, literally millions of bank customers will be coming on
stream for whom the Internet has been a way of life since
childhood. It will be a challenge for the banking industry
to be prepared for this coming boom.
In short, the Internet holds tremendous promise for gener¬
ating value for banks and their customers, and, with you, I
look forward to learning more about what the future holds
in this important area of the economy. This conference
takes us an important step in that direction.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 31
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before the
National Association of Affordable Housing Lenders, on community
development bankers, Washington, D.C., March 1, 2001
I’m delighted to be a participant in NAAHL's [National
Association of Affordable Housing Lenders] annual legis¬
lative and policy conference, and am grateful for the op¬
portunity to share my thoughts with you on some subjects
of mutual concern. You and the organizations you repre¬
sent deserve great credit for the immensely important
work you’re doing every day in cities and towns all across
America. Thanks to you, our country is a better place to
live—and not just for those who are the direct beneficia¬
ries of your work. I'm particularly proud of the contribution
that national banks make to your efforts, not only as lend¬
ers and investors, but also as partners fully committed to
the communities they serve.
Community development (CD) is a rich and varied field.
But whether your specialty is some facet of small-
business lending, or affordable housing, or something
else, each of you is also in the business of overcoming
challenges. Your experiences have demonstrated that
community-development lending can be good business;
that low-income individuals are generally just as reliable—
sometimes even more reliable—in meeting their financial
obligations as more affluent borrowers; and that through
public and private partnerships, communities can be
rebuilt—one brick, one building, one block at a time.
Now there’s a new challenge before us. The prosperity of
the 1990s may not have lifted all boats, but there’s little
doubt that the benefits of nearly a decade of uninter¬
rupted economic growth were widespread. It’s no coinci¬
dence that the last decade was also one of dramatic
accomplishment in the community development arena.
And there’s little doubt that at least some of the CD
projects undertaken over the last 10 years would have
had trouble getting off the ground in a less buoyant
economy.
So it's natural for those directly involved in these commu¬
nity development projects to wonder whether and to what
extent the current economic slowdown will affect current
and future CD initiatives.
Obviously, a lot will depend on the nature of the slow¬
down. With any luck, it may turn out to be a mere interlude
before the economy regains its momentum. While I don’t
want to speculate on economic issues beyond my pur¬
view, the OCC has, over many months, been working du¬
tifully, through what I believe has been judicious
supervision of national banks, to ensure that our banks
remain healthy and retain the ability to continue to make
loans to creditworthy borrowers, at prices that fairly reflect
the risks and costs involved. That's the best way to safe¬
guard the strength of the banking system—and the
strength of the economy that depends upon it.
But we can't rule out the possibility that economic uncer¬
tainty and a reduced appetite for risk on the part of finan¬
cial institutions could affect the viability of some
community development projects, especially those still on
the drawing board, and put bank officials responsible for
these projects into a position of having to justify them
anew.
How do we respond to this challenge? And what can be
done to assure that the progress of recent years in re¬
building our communities continues, regardless of which
way the economic wind blows?
I don't think anyone who hears banks discuss their CD
activities today can help but be struck by a shift in atti¬
tude. Most banks that are active in this market character¬
ize their involvement as motivated by sound business
considerations, rather than as a legal imperative. Banks
have increasingly found that if they structure and manage
community development loans and investments, it doesn't
take years before they start paying off. As neighborhoods
stabilize, property values rise, residents begin to accumu¬
late wealth, and they return with their business to the
banks that helped them succeed. When banks invest in
their communities, they're also investing in their own future
success.
Indeed, our leading financial institutions are institutionaliz¬
ing their involvement in community development. Under
the law, banks need at least satisfactory CRA ratings in
order to take advantage of various expansion opportuni¬
ties, but the activities that qualify for those ratings increas¬
ingly stand or fall on their merits, as they should. CRA
should not be the sole determinant of whether or not
banks take on a project. A program of community devel¬
opment investments motivated solely by carrot-and-stick
inducements is not likely to be as effective in achieving
beneficial results for the community as one that is solidly
grounded in the underlying economic merits.
Still, as I suggested earlier, the merits of some CD
projects are not always self-evident, and at a time of
growing earnings pressure for financial institutions, these
projects may find themselves under tougher scrutiny than
ever before. In this more challenging economic environ-
32 Quarterly J ournal, Vol. 20, No. 2, J une 2001
merit, community development bankers will have to be¬
come more efficient, more resourceful, and more creative
in structuring projects in ways that reduce risk and maxi¬
mize returns—for the community and the financial institu¬
tion itself.
Fortunately, we have each other's experiences to draw
upon and learn from. From our experience in administer¬
ing the Part 24 investment authority and in working with
national banks seeking to expand community develop¬
ment activities, we see examples every day of how banks
have learned to conduct these activities in a way that is
creative, efficient, risk sensitive, and profitable. I’d like to
share a few of these examples with you today.
First, we've learned that an integrated approach to com¬
munity development works best. There was a time when
banks addressed community development needs simply
by easing the requirements for traditional products like
small-business and mortgage loans so that some nontra-
ditional customers could obtain them. Now, there's a
wider recognition that substandard housing and a lack of
small-business capital are symptoms of deeper ills that
afflict our neediest communities, and that banks that de¬
fine their own participation more broadly in programs that
attack these ills at their source can not only make impor¬
tant contributions to the health of the communities in
which they operate, but can do so in a manner that is fully
consistent with safety and soundness and reasonable
profitability.
This generally means offering an integrated menu of CD
lending, investment, and service products, and of em¬
bracing a strategy of targeting these products to desig¬
nated neighborhoods, rather than scattering them over a
wider area. Although some banks still choose to special¬
ize in a particular product line, many offer a broader mix
that may include support for single- and multi-family hous¬
ing construction and rehabilitation, small-business estab¬
lishment and expansion, larger commercial development,
and infrastructure improvements. Some banks even inte¬
grate into their community development strategy the fi¬
nancing of hospitals and health-care clinics, educational
facilities, churches, and libraries that serve or are located
in the targeted communities.
Second, we’ve learned that comprehensive community
development requires comprehensive community effort,
including local governments, community organizations,
charitable and religious groups, the business community,
and other interested parties. It may require several lend¬
ers to work together, pooling their resources and exper¬
tise. And this coordination and cooperation should come
into play, not just when a passing need arises, but as part
of an ongoing relationship that does not necessarily end
when the keys are turned over to the new homeowner or
small-businessperson.
Teaming up with experienced and well-run nonprofit
CDCs can actually reduce a bank's transaction costs if
the CDC partner prescreens the good deals from the bad
ones, provides pre-purchase homeownership counseling,
and helps to shape up credit proposals that satisfy the
bank's needs and requirements.
The bank partnerships I've seen are as varied as the or¬
ganizations that enter into them. And there are about
3,600 community development corporations currently op¬
erating, four major national housing intermediaries and
their subsidiaries, and thousands of financial institutions of
every type—it’s obviously difficult to generalize—except
about the importance of flexibility in choosing the right
partners for each project.
The CDCs can play a crucial role as intermediaries and
facilitators. They typically provide resources and services
that supplement banks' activities, gather market informa¬
tion about the neighborhoods in which banks are contem¬
plating lending or investment, and enhance
communications between banks and community resi¬
dents. They work with local governments and utilities to
obtain licenses and approvals. They may provide a variety
of customer-support services, including counseling for po¬
tential homebuyers and recent homebuyers, and those
interested in starting or expanding a small business. Such
counseling can make the difference between a loan that
stays current and one that becomes troubled; and it's a
service that many of the CDCs do very well.
The third point speaks to the importance of creativity in
assembling financing for CD projects. Flere, too, banks
may be able to take advantage of a variety of
resources—in the form of public subsidies, tax credits,
secondary market mechanisms, and foundation grants, to
name just a few—that only a short time ago either did not
exist or were unavailable for purposes of community de¬
velopment. But they are now, in part, because CD
projects have achieved greater recognition and viability in
the marketplace. Indeed, there are likely to be increased
opportunities for public and private collaboration resulting
from the recent expansion of federal low-income housing
tax credits, tax exempt bond authority for the states, and
other economic development initiatives like the New Mar¬
kets program, passed by Congress.
Banks often work with each other in order to share ex¬
penses and spread risk; often times, they have no choice
in the matter, given the scope of the undertaking. CDCs
and Community Development Financial Institutions fre¬
quently serve as vehicles through which these multi-bank
sharing arrangements are consummated. Most frequently,
Quarterly J ournal, Vol. 20, No. 2, J une 2001 33
CDCs are sources both of supplemental financing and of
expertise in arranging such financing from third-party
sources. Especially for smaller banks, which may lack in-
house expertise of their own, community organizations of¬
ten can provide technical knowledge to help assemble
these frequently complex financial packages. As a result,
they are often able to offer opportunities to banks to par¬
ticipate in projects as lenders or investors, that the banks
would not have been able to arrange on their own.
Let me give you another example of how CD lending and
investment can be creative, safe, and profitable. In a re¬
cent issue of our Community Developments newsletter,
we highlighted a low-income housing tax credit transac¬
tion in the Bickerdike neighborhood of Chicago that in¬
cluded five sources of financing. The bank's permanent
mortgage amounted to only 2.9 percent of the total
project cost. I know that the lender sleeps much more
peacefully knowing that not a single dollar of the addi¬
tional $6.4 million invested in this deal has a priority over
the bank's first mortgage position.
The kind of partnering between financial institutions and
community organizations that I've been describing en¬
ables each party to the transaction to focus most effi¬
ciently on what each does best, and to get maximum
impact from each dollar in meeting the pressing needs of
their communities. It's also the best way to ensure that CD
projects are not disproportionately affected by changes in
the economy.
In my recent travels around the country, I've seen these
techniques at work, changing neighborhoods and chang¬
ing lives. Here in the nation’s capital, where skyrocketing
real estate values have contributed to a severe shortage
of affordable housing, the Local Initiatives Support Corpo¬
ration, or LISC, has been a catalyst for revitalization ef¬
forts. Its work in the long-depressed 14th Street corridor
offers a good illustration of how creative financing can
bring ambitious CD projects to life. In one case, Washing¬
ton’s historic Whitelaw Hotel was converted into 38 units
of affordable rental housing, using national bank invest¬
ments in LISC's National Equity Fund, investments made
possible by the OCC’s Part 24 investment authority. The
project also received assistance from the federal Low In¬
come Housing Tax Credit and Historic Tax Credit pro¬
grams.
In Chicago, New York, and many other cities, local Neigh¬
borhood Housing Services organizations have done he¬
roic work in troubled communities, arranging financing for
housing construction and rehabilitation, and working with
local government to reduce crime, improve city services,
and make these communities attractive places to live.
And it's not only our big cities that are seeing the benefits
of community development partnerships. In a small town
in the Midwest hit by the loss of a major employer, a
national bank resolved to turn things around. Working with
state and local officials, public utilities, and members of
the business community, the bank took advantage of Part
24 authority to finance construction of three commercial
buildings. Because the new buildings were located within
a state enterprise zone, the tenants received significant
tax advantages. As a limited partner in these arrange¬
ments, the bank received cash dividends from the sale of
the properties. But for the bank and its partners, the big¬
gest dividends lie ahead, as prosperity makes a come¬
back in that town.
I know of many such stories, and I imagine that any of you
could tell a few of your own. What's significant is that
these are no longer isolated cases. They're the expression
of a trend full of promise for our needy communities. Be¬
cause of your hard work—and the resourcefulness and
creativity that you bring to it—I believe that community
development has passed that critical point of no return.
Community development activities will continue to thrive
even during difficult times as long as banks and their
partners work together, pooling resources and expertise in
an integrated and targeted approach to the business. Our
communities are counting on your continued commitment
to a cause so vital to their well being—and yours. I have
never been more confident that we’re equal to whatever
challenges the future holds—one brick, one building, one
block at a time.
34 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before the
Institute of International Bankers, on Internet banking, Washington, D.C.,
March 5, 2001
The MB’s [Institute of International Bankers’] annual Wash¬
ington conference has long been a highlight of the season
for me and for the Washington financial community, and
I'm delighted to be speaking to you at such an eventful
time for international bankers. The past year has seen a
number of supervisory initiatives of real consequence for
MB members. But rather than surveying what is truly a
broad field, I thought I'd focus in on one area that's en¬
gaged a considerable portion of my time and thought in
recent months—the supervisory challenges presented by
Internet banking.
The rise of the Internet will certainly be remembered as
one of the defining developments of our time. The finan¬
cial services industry felt its effects early on, and in some
parts of the industry the effects were far reaching. Online
trading of securities, which offered customers cost sav¬
ings and convenience that traditional brokers were hard
pressed to match, not only transformed the securities
business, but also helped drive the bull market that
reached its peak last year. There's little doubt that the
advent of online trading was a big factor in the increase in
the number of Americans who have participated in these
markets in recent years.
In the banking industry, the effects of the Internet have
been less dramatic, but scarcely less significant. Three
years ago, only about 100 banks and thrifts offered any
banking services over the Internet. Since then, the rate at
which banks have “gone online” has been rapid, espe¬
cially compared to the early phases of other technology-
based banking services, such as automated teller
machines. Although five institutions have already been
chartered by the OCC as Internet banks, the vast majority
of banks that have embraced the Internet have done so
as an additional delivery channel rather than as a stand¬
alone application. Today, most banks see the develop¬
ment of online services as a major component of their
business and marketing strategies, and are investing very
significant resources in upgrading their technological ca¬
pabilities and in acquiring the human resources to effec¬
tively utilize those capabilities.
The dynamism of Internet banking is reflected in a recent
OCC survey. It shows that 37 percent of all national banks
allow customers to conduct financial transactions online—
nearly twice as many as were offering online transactional
services only 15 months earlier. Twenty-eight percent of
national banks make account information available on the
Internet. Thirty-five percent of national banks still have no
Internet presence, but they are invariably smaller banks
that, in total, account for only 10 percent of all national
bank customers. Even so, the number of national banks
that are not online in some capacity is almost certain to
drop, as bank customers increasingly come to expect
online access to their financial information, regardless of
the size of the institution they bank with.
Whether conducted as a stand-alone activity or as an
adjunct to a traditional network of brick-and-mortar
branches, Internet banking obviously poses some spe¬
cial risk management challenges for bankers and supervi¬
sors. For example, most banks outsource the technical
design, installation, and maintenance of their Internet sys¬
tems, choosing not to do themselves what others can
probably do better and cheaper. But the relationship be¬
tween the bank and the technology vendor takes on a
new sensitivity in the Internet environment. The more cus¬
tomers respond to marketing efforts and increase their
reliance on bank Web sites to conduct routine transac¬
tions remotely, the greater the bank's dependence on
those who make those transactions possible. In such situ¬
ations, banks have a great deal to lose—reputationally
and otherwise—if the vendor’s performance comes up
short.
Security is another issue with serious implications for
Internet banking providers. The risk of intrusions and se¬
curity breaches has grown exponentially with the number
of remote access devices and the availability of sophisti¬
cated tools that, in the wrong hands, can turn just about
anyone with access to a PC into a dangerous hacker.
And, with more and more sensitive information available
online, computer criminals—as likely to be motivated by
politics or self-aggrandizement as material gain—have
greater incentive to cause mischief than ever before.
Finally, Internet banking presents unprecedented cross-
border and international challenges for bankers and bank
supervisors. It’s this aspect of the Internet banking phe¬
nomenon that I'd like to focus on today.
We should begin by noting that the risks I've just
mentioned—a list intended to be suggestive rather than
exhaustive—are by no means unique to Internet banks.
All financial institutions run risks associated with outsourc¬
ing and information security, whether or not they operate
in the Internet environment. And all financial institutions
that operate in the international environment—as each of
you well know—have to deal with cross-border issues re-
QuarterlyJ ournal, Vol. 20, No. 2, J une 2001 35
lating to such things as the political, economic, and social
values and habits of their transnational customers and the
legal and regulatory frameworks of host countries.
The Basel Committee on Bank Supervision was born of
the recognition that banks everywhere face common—
and increasingly interrelated—risks. Since its establish¬
ment in 1974, the committee's work can be understood in
terms of two general goals. First, it has always had as its
purpose to facilitate the exchange of ideas and the shar¬
ing of practices capable of being adapted to the special
circumstances of each nation’s supervisory system. Ini¬
tially, the committee's approach embraced a kind of non-
judgmental agnosticism—rejecting, if only by implication,
the idea that any one supervisory approach was prefer¬
able to another, and operating from the presumption that
the bank supervision that suited one nation might not suit
another. But over the years, while by no means abandon¬
ing its deference to and respect for national differences,
the committee has evolved a commitment to common
principles of supervision, aiming to harmonize global su¬
pervision and to establish minimum supervisory standards
where necessary. The committee's work on capital stan¬
dards is perhaps the best known example of this ap¬
proach.
Second, in a more active mode, the committee has striven
to become a deliberative body through which coordinated
supervisory responses can be fashioned to situations that
require them. Indeed, it should be remembered that the
committee had its genesis in the Bankhaus I.D. Herstatt
incident of 1974—a relatively small bank whose failure
had global repercussions. For bank supervisors, that
event was a wake-up call, and from it came a new com¬
mitment to international cooperation, which was increas¬
ingly recognized as essential if the spillover effects of
such disruptions were to be contained. Further, supervi¬
sors recognized that instability in the international setting
was a two-way street—that it could move from the prov¬
inces to the center, as it were, just as easily as from the
center outward, as was the case with Herstatt. Either way,
cooperation among supervisors was crucial.
So, the challenge of cross-border supervision was a big
part of the committee's raison d’etre from the beginning,
and an early focus of its work. In 1983, the committee
released a set of principles for the supervision of banks'
foreign establishments, which was revised in 1992 and
then again in 1996. These statements established four
main principles:
• All international banks should be supervised by a
home country authority that capably performs consoli¬
dated supervision and has the right to prohibit corpo¬
rate structures that impede supervision;
• The creation of a cross-border banking establishment
should receive the prior consent of both the host coun¬
try and the home country authority;
• Flome country authorities should possess the right to
gather information from their cross-border banking es¬
tablishments; and
• If the host country authority determines that any of
these three standards is not being met, it could impose
restrictive measures or prohibit the establishment of
banking offices.
These principles, which use the respective roles of
“home" and “host" country as the basis for developing
cooperative cross-border bank supervision, provided sig¬
nificant comfort to host-country supervisors. They pro¬
vided a reasonable basis for concluding that cross-border
branches and subsidiaries licensed and supervised within
their borders were being capably supervised by the par¬
ent bank's home-country supervisor.
But this guidance did not reckon with the Internet. The
guidance was grounded in the assumption that cross-
border banking will be carried out through a physical
presence in the host country. It never contemplated the
virtually unlimited capability of Internet banks to distribute
products and services across national borders without a
physical presence. It did not address the practical difficul¬
ties facing host country authorities that might wish to
monitor or control Internet banking offerings originating in
other jurisdictions, at least insofar as those offerings
reached citizens of the host country. It did not take into
account the potential ability of a bank or nonbank to use
the Internet to cross borders and to seamlessly link bank¬
ing activities that might be unsupervised by any financial
market authority.
It was in response to these circumstances that the Basel
Committee formed a subgroup, the Electronic Banking
Group, or EBG, which it's my honor to chair. The EBG
membership comprises 17 central banks and bank super¬
visory agencies from G-10 countries, along with a number
of observers.
One of the EBG's first orders of business was to inventory
and assess the major risks associated with e-banking.
Those risks, we concluded, fall into six broad risk catego¬
ries: strategic risk; legal risk; operational risk; country risk;
reputational risk; and, finally, credit, market, and liquidity
risk.
The EBG's catalogue of e-banking risks—and the all-
important question of how bankers and bank supervisors
might best respond to those risks—have largely defined
the EBG's agenda over the past year. It's been a year of
intensive research and study. We initiated an ambitious
36 Quarterly J ournal, Vol. 20, No. 2, J une 2001
outreach and communication program with prominent
private sector institutions active in e-banking develop¬
ments and activities, including financial institutions, third-
party service providers, and vendors. A series of Industry
Roundtables, held in North America, Europe, and Asia,
have allowed the EBG to obtain invaluable insight and
information regarding e-banking risk issues, current stra¬
tegic and product developments, and emerging risk
management standards. It's been a lively and productive
year.
Now, after digesting all that we've learned, the EBG has
prepared a report entitled “Principles for Risk Manage¬
ment of Electronic Banking,” which is in final draft, and I
expect will be released for public comment later this
month. The theme of the report is that e-banking should
be conducted with no less attention to the fundamentals
of safety and soundness than banking activities con¬
ducted through traditional delivery channels. Our report
presents 14 risk management principles, organized under
three headings: Board and Management Oversight; Secu¬
rity Controls; and Legal and Reputational Risk Manage¬
ment.
In preparing this guidance, we have tried to be as spe¬
cific as possible in alerting financial institutions and their
supervisors to the nature of the risks they face in the
e-banking environment and in suggesting sound prac¬
tices to manage these risks. But, we have also been
mindful of the fact that each e-banking situation is differ¬
ent and may require its own customized approach to risk
mitigation. Our expectation is that bankers will put these
principles to use as they develop policies and procedures
to govern their e-banking activities.
More recently, the EBG has turned its attention to devel¬
oping guiding principles for cross-border cooperation
among bank supervisors. In a study now under way, we're
looking more specifically into the practical difficulties of
applying the existing Basel cross-border framework in the
Internet environment, how home countries should go
about supervising Internet banks, how host countries can
be affected, how differing supervisory standards for
Internet banks can be reconciled, and how home- and
host-country supervision of these “virtual” banks might
work. Finally, we're working to identify possible actions
that the bank supervisory community can take to facilitate
supervisory cooperation on cross-border Internet banking.
Since I've already offered a few examples of how Internet
banking has complicated implementation of the existing
Basel cross-border principles, let me give you some idea
of where our thoughts are now headed in terms of what
may be required to cope with the supervisory challenge of
the virtual environment.
Our fundamental belief is that the responsibility for effec¬
tive supervision of Internet banking—even more than for
brick-and-mortar banking—rests with the home country
supervisor. Home supervisors need to make certain that
their banks understand the risks posed by Internet bank¬
ing and how to manage these risks effectively. As I’ve
mentioned, the EBG has dedicated considerable time and
effort to that goal. Communicating supervisory expecta¬
tions and procedures for overseeing Internet banking ac¬
tivity is essential both to help ensure that locally
supervised banks properly manage risks and to help host
supervisors understand the supervisory regime that the
home supervisor uses for its institutions.
Where, then, does the host supervisor enter the picture?
Is its role limited to placing its faith in the competence and
good intentions of the home supervisor and hoping for the
best? How do local policies on a whole variety of issues
get taken into account? In the earlier world of physical
banking, these were relatively easy issues, since any insti¬
tution working to establish a physical presence in a host
state could be required to obtain a license that would
expressly subject them to local laws and policies.
Needless to say, sound principles of cross-border super¬
vision in the virtual world must address the role of host
country supervision. While Internet banking certainly
poses difficulties for the host country, the EBG is develop¬
ing a progressive framework for host country supervisors
to use, if, for example, they become concerned about the
legality or prudential nature of a foreign bank's Internet
banking activities. This escalating approach would have
the host country supervisor start by remonstrating with the
foreign banking entity itself. If that proved unsuccessful,
the supervisor would bring the problem to the attention of
the home country supervisor. And, if that too did not pro¬
duce the desired results, the host supervisor would alert
local consumers that the Internet banking entity was oper¬
ating improperly. At the heart of this approach is the belief
that supervisory cooperation is crucial to supervisory ef¬
fectiveness in the Internet environment.
Of course, difficult issues may well be presented. For ex¬
ample, how much contact with a country must a foreign
Internet institution have to warrant application of host
country laws? And what legal sanctions might a home
country have to vindicate its policies? These are far-
reaching questions not covered by the EBG's work.
It's worth mentioning that efforts are underway to enlarge
the realm of supervisory cooperation. Early last month, the
Financial Stability Forum’s Contact Group on E-Finance
held its first formal meeting. This group, which I also chair,
was formed to promote enhanced information-sharing
among the various international sector-based working
Quarterly J ournal, Vol. 20, No. 2, J une 2001 37
groups dealing with e-finance supervisory issues—e-
trading, retail payments systems, e-commerce, and so on.
At our recent meeting, we exchanged information on each
other’s work plans, took stock of e-finance developments,
and explored areas for enhanced cooperation across in¬
dustry sectors on supervisory policy. Three e-finance is¬
sues were identified as warranting consideration from a
cross-sectoral standpoint: risk management principles for
providing online financial services; greater prevalence of
third-party dependencies, including outsourcing; and
cross-border issues. We agreed that while it would con¬
duct no operational or policy development on its own, the
Contact Group would serve as a clearinghouse for col¬
laboration among the constituent working groups. Such
collaboration, we believe, holds the key to effective super¬
vision of e-finance activities in the future.
The future, members of the Contact Group agreed, is
where the real challenges for supervisors lie. Because
most e-finance activities are still in their infancy, the risks
those activities present are not great at this time. What is
urgent, however, is that we come to terms with the super¬
visory issues they present and build on the existing frame¬
work of international cooperation to address them. By
understanding the issues and working together now, a
practical cross-border approach to supervision should be
attainable before the potential risks become a material
reality.
38 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before the
National Community Reinvestment Coalition on electronic transfer
accounts for the unbanked, Washington, D.C., March 6, 2001
Winston Churchill used to say of democracy that it was
the worst form of government ever devised—except for all
the others. Churchill’s comment can also be applied to
banking. Although little loved, banks are nonetheless the
best instruments yet invented for the promotion of thrift,
wealth, and general prosperity. That's why we focus so
much on what banks can do to help improve the lot of
Americans who remain outside the financial mainstream.
And that's what I want to focus on this afternoon.
Bankers have never had a monopoly on the provision of
financial services in this country. They have always shared
that market with a host of other providers—many of them
unregulated—and that's never been truer than it is today.
A walk through virtually any town or city in America gives
a sense of how diverse the financial marketplace is, and
how many different kinds of financial providers operate
and compete in our communities. All of them have a role
to play in meeting a wide variety of financial needs.
Choice, after all, is an essential element of our economy,
and to suggest that banks can be, or should try to be, all
things to all people would be unrealistic.
Yet, not all financial providers are created equal. At the
risk of sounding parochial, let me suggest that banks add
unique value to the services they deliver. Though there
may be no end of places to cash a check, get a loan, or
pay a bill, the millions of Americans who—for whatever
reason—don't obtain those services through a bank, lose
something important in the process.
What they lose are the tangible and intangible benefits
that a relationship with a mainstream financial institution
can provide. That may include the incentives and institu¬
tional support necessary for individuals to build assets,
transaction services at prices below those of unregulated
fringe providers, and financial services that fringe provid¬
ers can’t offer at all, such as safe repositories for funds,
and cheap and efficient payment services. For a small-
business loan, a loan for education or job training, or an
affordable mortgage, only a bank or other mainstream in¬
stitution will usually do.
There are also the benefits of building a formal credit
history and a long-term financial relationship with a bank.
The importance of those intangible benefits cannot be
exaggerated for anyone who wants to climb the ladder of
success in this country today.
If all this is so, why then do some 10 million American
families still not have an account with an insured deposi¬
tory institution? It's possible, of course, that the benefits
I've just described are not well understood by those who
don't presently enjoy them. Thus, the work that you, and a
host of government, community, and consumer organiza¬
tions around the country do to enhance basic understand¬
ing of financial issues is a crucial aspect of tackling this
problem. Educating people about making wise choices
and avoiding the pitfalls that dot the road to financial se¬
curity will always be an important facet of any strategy to
address the problem of the unbanked.
Another explanation is the physical shortage of banking
outlets in communities that are home to the unbanked—a
situation that could be related to the consolidation that
has taken place in the banking industry. A recent govern¬
ment study found, not surprisingly, that low-income central
city neighborhoods have fewer bank offices than higher-
income neighborhoods and those outside the central city.
Affluent neighborhoods, where the median income was
120 percent or greater than the area median income, had
three times as many bank offices per 10,000 residents as
neighborhoods where the median income was 50 percent
of area median income. In New York City, at last count,
only 2.5 percent of all bank branches were located in
low-income areas that housed more than 6 percent of the
city's total households. In those areas, unregulated check¬
cashing establishments outnumbered bank branches by
as much as two to one.
When we look for explanations from banks that have a low
profile in low- and moderate-income neighborhoods, what
they tell us is usually valid—but not necessarily sufficient.
Some have tried to make a go of it, only to find that they
were unable to make a profit. Some have pulled out of
certain communities—or chosen not to enter them in the
first place—due to security concerns. And others have
decided that service to the unbanked was inconsistent
with the upscale image they were seeking to cultivate.
It's obvious, I think, that in order to serve the community
effectively, an institution should have a physical presence
there. But the lack of physical access to banks cannot be
the entire answer to the problem of the unbanked. Many
of those who remain outside the banking system are there
by choice. Neighborhood residents will walk right past the
local bank branch—which is usually pretty hard to
miss—to get to the check-cashing outlet next door. Obvi¬
ously, even where banks do operate, they're not always
meeting the needs of the local community.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 39
The best way to find out what those needs are is to ask,
and when we do, we usually hear the same thing. People
who lack banking relationships tell us that they are un¬
comfortable in banks and, especially in communities in
which English is not the dominant language, that it's
sometimes difficult to communicate with bank personnel.
Some express concerns about confidentiality. But more
than anything else, they tell us that conventional banking
services simply cost too much for small customers. And
the evidence suggests they're right.
According to a 1999 study by the U.S. Public Interest
Research Group, the average minimum balance required
to avoid fees for checking accounts at large banks was
$616. Consumers who were unable to meet that minimum
balance requirement paid an average of $217 a year, or
$18 a month, to maintain a checking account. That’s
about the same price that a full-time worker earning the
federal minimum wage would pay to cash his or her pay-
checks at a typical check-cashing outlet. Even for “no
frills” accounts, which provide limited check-writing with
no minimum balance, consumers paid an average of
$148 a year. Most banks also levy high charges for
bounced checks—as much as $20 to $25 each. Indeed, I
once heard a representative of one of our major money
center banks boast about how bounced check fees were
an important profit center for his institution—which, if true,
is shocking and, in any event, not a very smart thing to
say publicly. Households with low incomes may be at
greater risk of paying these fees, both because they
maintain low balances and because they may have less
experience in managing household finance.
Given these realities, it's no wonder that so many low- and
moderate-income Americans choose not to conduct finan¬
cial transactions at a bank. But it's a decision that carries
serious long-term consequences—for the unbanked, for
the economy, and for banks themselves, which lose cus¬
tomers whose business could well be profitable over time.
The challenge, then, is to find a way to build relationships
between the unbanked and the mainstream financial insti¬
tutions that make economic sense for both, over the short-
and long-terms.
We have a prototype for such a relationship in the Elec¬
tronic Transfer Account, or ETA, which was developed un¬
der my direction when I served as Under Secretary of the
Treasury for Domestic Finance. It would be superfluous for
me to describe in detail the features of the ETA to an
organization that has been as intimately involved as
NCRC has been in its development and promotion. The
opportunity should not pass to congratulate you on the
important role NCRC continues to play in this effort.
But in the context of our discussion today, it's important
not to forget that that ETA concept evolved from a busi¬
ness decision by Congress, embodied in the Debt Collec¬
tion Improvement Act of 1996, to reduce the cost of
delivering federal payments by requiring that they be de¬
livered electronically. Projections were that, when fully
implemented, the conversion from paper to electronic
funds transfer would save the government upwards of
$100 million per year—28 cents for every paper check
that would no longer have to be printed, issued, and
mailed—and replaced when the first one went astray.
Of course, it was widely understood that these savings
were not going to materialize unless those required to
receive payments electronically had the means to do so,
and we estimated that nearly 20 percent of all federal
benefits recipients did not have accounts at a financial
institution. The Debt Collection Improvement Act man¬
dated that the Secretary of the Treasury assure that any¬
one required under the Act to receive a payment directly
have access to an account at a bank for that purpose at a
reasonable cost. It was in response to this mandate that
we developed the ETA—a model for a utilitarian, all-
electronic account, which, for a fee of no more than three
dollars a month, allows recipients of many kinds of federal
payments, including salaries and retirement benefits, to
access their funds automatically through electronic funds
transfer. The ETA was purposely designed as a “bare
bones” model, in order to not preempt the development of
more elaborate accounts by banking institutions.
With the help of NCRC and more than 1,400 local
community-based organizations, consumer groups, and
faith-based groups who are participating in the nationwide
ETA campaign, we're making tremendous progress in get¬
ting the word out to potential account holders. And finan¬
cial institutions, which receive $12.60 for every ETA they
open, are rapidly signing up to offer it. Right now the ETA
is available at more than 600 financial institutions with
thousands of branches nationwide.
What's particularly encouraging is that many of these in¬
stitutions are aggressively marketing the ETA as part of
their basic retail banking strategy. Some banks are waiv¬
ing or reducing the monthly service charge, making low-
cost money orders available as an additional benefit to
account holders, and allowing ATM withdrawals in excess
of the four they are required to allow under Treasury rules.
Some banks are offering cash bonuses to the account
holder when the first government payment is received.
Some are holding promotional events with local govern¬
ment officials. Others encourage tellers to talk about ETA
with customers trying to cash a federal check, and offer
tellers a bonus for every ETA customer they sign up.
Any program so new is inevitably a work in progress, and
we certainly have a long way to go before we can declare
the program a success. How shall we measure that suc-
40 Quarterly J ournal, Vol. 20, No. 2, J une 2001
cess? Not so much, I believe, in the number of ETAs that
are opened, though that's important. I think, rather, that
the ETA's greatest value is as a stepping stone—for cus¬
tomers who use them to get a foothold into the financial
mainstream and for financial institutions who use the ETA
as a model to bring the benefits of a banking relationship
within reach of others. I see the ETA as a prototype for a
technology-intensive, low-cost account capable of gener¬
ating profits—or at least paying its own way—for the
banks that offer them and attracting millions of Americans
who do not currently receive federal payments into the
banking system. That's what I meant by the importance of
building relationships between the unbanked and main¬
stream financial institutions that make economic sense for
both.
Technology, I believe, is crucial to the solution. The sav¬
ings generated by a shift from paper-based systems, like
traditional checking accounts, to electronic delivery
should make it possible for banks to offer low- and
moderate-income customers basic banking services at
prices both can afford. That was the logic behind the ETA,
but it doesn’t require government involvement to make it
work. The importance of technology has significant impli¬
cations for legislators and community groups that have
typically focused on traditional paper-based delivery in
promoting so-called “basic banking” legislation as a solu¬
tion to the problem of the unbanked.
The ETA and similar types of electronic accounts also
have important implications for the spread of unregulated
fringe providers. Check-cashers and payday lenders of¬
fering high-priced services flourish where there are no
lower-cost alternatives. But with the cost savings possible
through electronic delivery, surely banks could offer these
services at lower prices.
Indeed, we see more and more banks drawing inspiration
from the ETA, but going well beyond it, developing their
own low-cost electronic accounts that link direct deposit
of payroll with a menu of services that can be accessed
through ATMs, debit cards, and even personal computers.
Banks are targeting local employers to publicize the ad¬
vantages of direct deposit-advantages that, according to
one research study, can add up to more than $1.25 for
each payroll check that doesn’t have to be issued. Sav¬
ings like that help explain why more than 50 percent of
private-sector employers participate in direct deposit
today—a fivefold increase in little more than 10 years. Still,
that takes us only half-way to what our goal should be—a
goal that other countries with advanced economies are far
closer to achieving.
Expanding participation among employees, of course, is
crucial, and banks are making significant headway in this
area, too. Bankers may visit work sites to distribute infor¬
mational materials and answer questions about direct de¬
posit and the accounts that are based on them. They’re
structuring these accounts in ways that make them in¬
creasingly appealing. In at least one case, employees re¬
ceive a debit card that, in addition to its customary
functions, can be used to transfer funds to individuals in
other countries at lower cost than a traditional wire trans¬
fer. Other types of accounts offer electronic payment fea¬
tures, enabling employees to pay recurring bills. And, I
know of a bank that offers customers short-term loans of
up to 50 percent of their regular incoming direct deposit
directly from an ATM. I can think of no better or more
constructive response to the payday lenders and others
like them who prey on our communities. It's one more way
that mainstream financial institutions can help low- and
moderate-income Americans get off the treadmill of debt
and onto the road of greater financial security.
I believe that technology offers great potential for bringing
the unbanked into the financial mainstream, with all of its
benefits. It also offers new possibilities for financial institu¬
tions to develop deeper and more profitable customer re¬
lationships. In order for these possibilities to be achieved,
banks, employers, and community organizations must
work collaboratively and creatively to understand the
needs of the individuals they serve. We in government
have an important role to play as well, but it's the work
you do in our communities, day in and day out, that will
make the most enduring difference in the lives of our citi¬
zens.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 41
Remarks by J ohn D. Hawke J r., Comptroller of the Currency, before the
Independent Community Bankers of America, on risk management, Las
Vegas, Nevada, March 8, 2001
I come to you this morning with some good news and
some bad news. I'm going to start with the good news, in
the interests of putting you in a positive frame of mind—
and of putting what follows into more meaningful perspec¬
tive.
It's almost impossible these days to avoid reports about
the decline in asset quality in bank portfolios. You can
track this decline in the press, in its migration from the
sidebars to the headlines and into the consciousness of
some of the nation’s senior pundits and economic policy
makers. Almost every week, some bank announces a new
round of write-downs and charge-offs, followed by solemn
pronouncements from the analysts that things are going to
get worse before they get better.
At the OCC, our own data, reflecting the experiences of
commercial banks of all sizes, confirm this weakening.
The year 2000 was the third consecutive year of increase
in the volume of large syndicated credits that were criti¬
cized in our annual interagency review. And that increase
came about in a rapidly growing economy. Econometric
models show a rise in default risk among publicly traded
U.S. companies—and, therefore, a rise in credit risk in the
banking system at large. Now, with the economy in a
slowdown, one investment firm projects a 50 percent in¬
crease in loan losses this year over last. And with that
increase, the overall ratio of loan loss reserves to loans
has eroded—from about 2.5 percent in 1993 to just over
1.5 percent last year. Future earnings will almost certainly
be impacted by the need to bolster loan loss allowances.
You’re probably thinking, “If that's the good news, I don’t
want to hear the bad news.” But there is good news for
you here. First, we believe that the banking industry gen¬
erally is better positioned to withstand these problems
than it's been at almost any other time. Second, commu¬
nity banks are generally much better positioned than their
larger counterparts.
Certainly, the capital strength of the industry is now far
better than it was 10 years ago. Total equity capital today
stands at more than twice what it was a decade ago, and
the related ratios—capital to assets and capital to loans—
are also much healthier. Clearly, bankers have internalized
a key lesson of the 1990s—that it's possible to meet all
the regulatory capital requirements and still not have the
level of capital you need to weather a time of great stress.
Indeed, at a recent OCC conference, the highly respected
former CEO of one of our major banks said that one of the
great lessons he learned over the past decade was the
critical importance of maintaining capital ratios apprecia¬
bly in excess of what we bank supervisors required.
Never again, he said, would he let capital fall to even the
highest level defined by the regulators.
We also believe that the industry is structurally stronger.
Consolidation over the past 10 years has given us a bank¬
ing system that should be more stable and more resistant
to downturns. Certainly the whole industry is more diversi¬
fied than it was a decade ago. Although community banks
are still subject to some inherent limitations in this regard,
the kinds of deep sectoral and geographic concentrations
we saw in the early 1990s—concentrations that proved
fatal for many banks—are much less common today. In
addition, noninterest income has come to play an increas¬
ingly important role in the composition of bank earnings.
The industry has taken advantage of changes in the law
and regulations to offer new products and services, thus
diversifying their income streams and reducing their de¬
pendence on volatile net interest income.
This movement toward diversification has come as part of
a dramatic overall improvement in most banks’ risk man¬
agement and mitigation capabilities. Bankers today—and
not only the largest banks—are using more sophisticated
analytical tools and computer models to manage increas¬
ingly complex risks. And bankers, even community bank¬
ers, have far greater opportunity through the use of
syndication and credit derivatives, and through the
securitization markets, to design and structure the types
of balance sheets and business franchises they desire.
We in the regulatory community have given a great deal
of thought to the lessons of 10 years ago. Our handling of
the crisis of the early nineties was widely criticized for
inconsistency—for undue supervisory forbearance when
problems first appeared, followed by draconian reactions
when those problems had matured to the point where they
could no longer be ignored. When banks showed reluc¬
tance to provide credit even to creditworthy borrowers,
supervisors were blamed for creating a “credit crunch.” I
happen to believe that credit crunches are caused by
conditions in the economy, and by banks that make eco¬
nomic decisions based on their own self-interest, and not
by bank examiners. I also recognize that regulators can
become an easy scapegoat for bankers to point to when
they have decided for their own reasons to tighten up.
Nonetheless, we learned a lot from that experience, and
we recognize the value of a supervisory approach that is
42 Quarterly J ournal, Vol. 20, No. 2, J une 2001
more modulated and predictable. Since becoming Comp¬
troller, I’ve emphasized the importance of fashioning a
carefully calibrated response to changes we see taking
place in the banks we supervise. But that does not mean
sitting by silently as conditions deteriorate. It means ad¬
dressing problems as we see them developing—while we
still may be able to do something about them—and doing
so consistently and in a measured way. Both in public and
in our private meetings with bankers, we have addressed
issues of declining underwriting standards and eroding
credit quality, and we will continue to address these is¬
sues, keeping in mind the need to do so in a balanced
manner. The greatest contribution we as bank supervisors
can make to the maintenance of a healthy economy is to
do what we can to help preserve the ability and capacity
of our banks to extend credit to creditworthy borrowers.
Clarity is a hallmark of good communications, and we're
certainly spending more time talking to the industry, ex¬
plaining our policies, and providing opportunities for
bankers to raise questions and express their concerns.
Today, if bankers think something has gone wrong in the
examination process, they can seek review by the OCC
ombudsman—an option that did not exist 10 years ago.
More recently we have introduced National BankNet—an
extranet Web site available exclusively to national bank¬
ers. BankNet now not only provides useful analytical tools,
industry and risk updates, “best practices" presentations,
and internal OCC reports, but also provides a means of
communicating directly with me, by e-mail. It will soon
enable national banks to prepare branch and relocation
applications on line and submit them electronically. And in
the very near future, BankNet will handle the majority of
routine transactions between the OCC and national
banks, and give the industry the power to file electronic
comments on regulatory proposals. This is a major im¬
provement in the ability of bankers and regulators to com¬
municate with one another, and it should result in
improved understanding and cooperation as we enter
these more challenging times.
Technology has also enhanced our ability to spot prob¬
lems brewing in the banking system so that we can call
early attention to them. Early in my tenure as Comptroller, I
initiated a major effort to improve our early-warning tools.
We dubbed it “Project Canary," alluding to the practice of
coal miners who brought canaries down into the
mineshafts with them to detect dangerous gases. Through
this effort we have developed a series of financial ratios
and measures that correlate with high levels of credit,
liquidity, and interest rate risk. By applying these mea¬
sures to our population of banks, we can make better
judgments about what problems may arise and how we
can deploy supervisory resources more efficiently.
Our approach to identifying, rehabilitating, and resolving
banks under stress is described in detail in an excellent
new OCC publication dealing with problem banks. It rep¬
resents the distillation of years of experience, and should
be especially useful to examiners—and to bankers—who
haven’t lived through times of banking turmoil.
Inevitably, the deterioration in the quality of bank portfolios
that I mentioned earlier has affected some banks more
than others. Few community banks, for example, hold
many of the speculative-grade, highly leveraged, and
poorly underwritten assets, especially those backed by
so-called enterprise value, which have been hardest hit of
late. Indeed, the level of troubled loans at community
banks has been relatively stable. While the percentage of
noncurrent commercial loans at national banks with over
$1 billion in assets nearly doubled over the last three
years—from 0.73 percent to 1.38 percent—it dropped
from 1.63 to 1.59 percent at smaller banks over the same
period. Similarly, loss rates at large banks have gone from
0.17 percent to 0.63 percent, which is just about where
they've been for small banks since 1997.
I'm sure you have your own theories to account for this
discrepancy in the performance of large and small banks,
and I have a few theories of my own. It may well be that
community banks are especially conscientious when it
comes to minding the fundamentals of sound banking—
keeping your ear to the ground, being responsive to your
customers, working with borrowers in a hands-on way at
the first signs of strain, pricing loans and other products
for risk, and establishing a rigorous internal control envi¬
ronment. Most community bankers do not have the kinds
of pressures faced by large institutions with widely held
share holdings—including a battery of analysts who follow
your stock and punish you for missing earnings targets by
as little as a penny a share. As a result, you are better
able to focus on long-term values in a way that will bring
enduring benefits to your shareholders.
But let me caution that no one become too smug or com¬
placent. It is not difficult for the problems afflicting larger
banks to spread from big borrowers to small ones and
from employers to employees—in other words, to your
customers. The sequence is a familiar one: a big com¬
pany defaults on its debt, or implements austerity mea¬
sures, or lays off workers, and the purchasing and debt¬
servicing power of those workers is reduced. That's when
the pain is likely to start showing up in your portfolio and
bottom lines.
So what you’ve got, really, is a window of opportunity—
time to take prudent, proactive steps to prepare for what
may come, and to mitigate the effects of future adverse
changes. How much time depends, of course, on the
length and severity of the slowdown in the economy. If it
turns out to be a mere interlude before the economy re-
QuarterlyJ ournal, Vol. 20, No. 2, J une 2001 43
gains its momentum, you may be able to escape with only
minor bruises.
For many community bankers, the test will be in how you
use this window of opportunity. It may mean doing more
of what you’ve already been doing—paying closer atten¬
tion to your customers and their individual financial condi¬
tion, and tightening board and management oversight;
continuing to build capital and reserves; identifying and
addressing vulnerabilities and excesses in the loan port¬
folio; making fuller use of whatever risk mitigation tools are
available, including government guarantee programs.
And, to prepare for the possibility that credit problems do
materialize significantly, it makes sense to evaluate your
work-out capabilities to ensure that problem loans can be
resolved in an orderly way.
This is also probably a good time to review your contin¬
gency funding plans. I know how difficult it's been for
many community banks as core deposits have dried up
and reliance on wholesale funding has grown. While this
transition has not been without its benefits, including
greater diversification and flexibility, it also exposes banks
to volatility in the event that the market turns against them.
That's another reason why it's so important that commu¬
nity banks act decisively to put their houses in order now,
to gain and keep the confidence of the financial commu¬
nity.
While some bankers might prefer that examiners ease off
in their criticisms of problematic loans, the task of bank
supervision is to give you our best assessments of the
quality of your portfolios. I think we have been doing that
extremely well, and a number of bankers, representing
large and small institutions, have told me that the OCC’s
balanced and consistent approach has helped them to
focus on credit risk problems and to improve deficiencies
in risk identification and risk management. You can count
on us to maintain this consistent and carefully modulated
approach—calling things as we see them—in the coming
months.
In business as in sports, defense usually trumps offense.
This year’s Super Bowl champions reminded us of how
true that is. For bankers, too, success in challenging times
begins at home, with strong risk management, robust in¬
ternal controls, and a no-nonsense approach to credit
quality. There's still time to make sure that your defenses
are in order, so that next year, there will only be good
news for us to share.
44 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Statement of J ulie L. Williams, First Senior Deputy Comptroller and Chief
Counsel, Office of the Comptroller of the Currency, before the U.S. House
Subcommittees on General Oversight and Investigations and on Financial
Institutions and Consumer Credit, Committee on Financial Services, on
coordination and information sharing among financial institution
regulators, Washington, D.C., March 6, 2001
Statement required by 12 USC 250: The views ex¬
pressed herein are those of the Office of the Comptroller
of the Currency and do not necessarily represent those
of the President.
I. Introduction
Madam Chair, Mr. Chairman, and members of the sub¬
committees, thank you for inviting the Office of the Comp¬
troller of the Currency (OCC) to participate in this hearing.
Effective coordination and information sharing among the
regulators of financial services providers—banks, securi¬
ties firms, and insurance providers—are essential in order
for the functional regulation framework established by the
Gramm-Leach-Bliley-Act (GLBA) to work as the Con¬
gress intended. In view of the integration of the financial
services industries that the GLBA permits, and the possi¬
bilities that individuals will migrate between industries and
entities will commence new activities, it is particularly im¬
portant for a functional regulator to have a means to know
whether individuals or entities have been subject to en¬
forcement actions by another functional regulator. On be¬
half of the Comptroller, I would like to thank you for your
efforts to further these objectives.
In my testimony today, I will first provide context for your
current legislative work by highlighting the most important
ways in which the OCC currently shares information with
other federal and with state regulators. I will then offer our
perspectives on key confidentiality and liability issues that
are raised by proposals to enhance information sharing
among financial services regulators.
II. Coordination and Information
Sharing: What the OCC Does Today
The OCC currently shares a variety of types of information
with federal and state regulators, including the other fed¬
eral banking agencies, the Securities and Exchange
Commission (SEC), and state insurance regulators. I will
first review our recent work with state insurance regula¬
tors, then turn to efforts involving the SEC and the other
federal banking agencies.
The OCC's Work with State Insurance
Regulators
Last year, when I appeared before the Subcommittee on
Finance and Hazardous Materials of the Commerce Com¬
mittee, I described the progress the OCC and the Na¬
tional Association of Insurance Commissioners (NAIC)
had made together in developing workable approaches to
sharing information about consumer complaints. As I
mentioned at that time, the OCC and the NAIC recog¬
nized several years ago that the sharing of certain types
of information not only benefits consumers through more
timely responses to inquiries and complaints, but also
serves to identify common cross-industry trends or prob¬
lems. As the first step in this process, the OCC and the
NAIC jointly drafted a model agreement in 1998 to share
consumer complaint information involving national bank
insurance sales activities. This agreement requires the
OCC to send to the appropriate state insurance regulator
copies of all complaints that the OCC receives relating to
insurance activities in that state by a national bank. Like¬
wise, the state insurance regulator will send to the OCC
copies of all complaints it receives involving a national
bank insurance activity. To date, the OCC has entered into
these agreements with 28 state insurance regulators.
Recently, the OCC and the NAIC have built upon their
success with the complaint-sharing process and jointly
drafted a second, more encompassing model agreement
that provides for the sharing of broader insurance-related
supervisory and enforcement information, including, but
not limited to the sharing of complaint information. Under
the agreement, the OCC and state insurance regulators
may request from each other, and provide to each other
with or without a request, confidential information regard¬
ing: (1) material risks to the operations or financial condi¬
tion of a regulated entity; (2) the insurance activities of a
regulated entity; or (3) other confidential information nec¬
essary to disclose fully the relations between a regulated
entity supervised by the OCC and a regulated entity su¬
pervised by the state insurance regulator. The information
requested must be in furtherance of the agency's lawful
examination or supervision of the regulated entity.
The NAIC adopted this model agreement in December of
last year, and just recently transmitted the final version of
Quarterly J ournal, Vol. 20, No. 2, J une 2001 45
the model agreement to its members. We expect to begin
entering into these new agreements as early as this week.
The OCC also has taken other steps to promote the ex¬
change of information that may be of use to other super¬
visory entities operating under the functional regulation
regime established by GLBA. For example, shortly after
GLBA was enacted, we amended our rules relating to
national bank corporate activities to ensure that informa¬
tion the OCC receives in connection with bank applica¬
tions to affiliate with entities engaged in insurance
activities is shared with the appropriate state insurance
department. Under the revised procedures, a national
bank must describe in its notice or application to the OCC
to establish a financial subsidiary or an operating subsid¬
iary, or to make a noncontrolling investment in an entity
that will engage in insurance activities, the type of insur¬
ance activities that the bank is engaged in or will engage
in and the lines of business for which the company holds
or will hold an insurance license. This information is then
forwarded to the appropriate state insurance regulator. To
date, the OCC has forwarded information contained in
almost 70 notices or applications that it has received.
Our information sharing is part of a comprehensive effort
to further develop close-working relationships with state
insurance regulators. With respect to insurance matters,
these efforts began in 1996 when the OCC invited state
insurance commissioners to the OCC to discuss ways to
better coordinate our respective regulatory responsibili¬
ties. Since then, the OCC and state insurance regulators
have met, separately or through the auspices of the NAIC,
on numerous occasions. Our most recent meeting, in fact,
was yesterday. To date, regional representatives of the
OCC have met individually with insurance regulators in all
50 states and the District of Columbia to learn more about
how we each implement our regulatory responsibilities as
well as to discuss ways we can assist each other in these
responsibilities. Moreover, senior OCC representatives at¬
tend NAIC quarterly national meetings on a regular basis
to exchange information about their respective regulatory
priorities and supervisory approaches and to discuss on¬
going regulatory or supervisory projects.
Most importantly, the OCC and the state insurance super¬
visors are no longer merely observers of each other’s
regulatory and supervisory activities. We each now ac¬
tively seek the participation of the other in matters of com¬
mon supervisory concern, and we recognize that the
other offers unique and relevant perspectives to the re¬
sponsibilities of each respective regulator. Two recent ex¬
amples illustrate the point.
First, the OCC and other federal banking regulators con¬
sulted with state insurance regulators, through the aus¬
pices of the NAIC, during the development of the
insurance consumer protection regulations required by
section 305 of GLBA. Section 305 required the OCC, the
Federal Reserve Board (Federal Reserve), the Federal
Deposit Insurance Corporation (FDIC), and the Office of
Thrift Supervision (OTS) jointly to issue regulations that
apply to retail sales practices, solicitations, advertising, or
offers of any insurance product by a bank (or other de¬
pository institution) or by any person engaged in such
activities at an office of the institution or on behalf of the
institution. The regulation includes, among other things,
specific disclosure requirements that must be made to the
consumer before completion of the insurance sale or in
connection with an extension of credit. The insurance
regulators and the NAIC proved to be a valuable resource
providing timely and helpful insights from the experience
of state insurance departments.
Second, the Consumer Protection Working Group of the
NAIC, chaired by Nat Shapo, director of the Illinois De¬
partment of Insurance, recently invited the OCC and the
other federal banking agencies to comment on proposed
revisions to the NAIC's Model Unfair Trade Practices Act,
a model statute that each state could use to establish
standards for bank and thrift sales of insurance in that
state. The revised Model Law is being specifically de¬
signed to take account of the preemption standards and
safe harbors for state insurance laws contained in section
104 of GLBA, as well as the federal consumer protection
provisions set forth in section 305 and the implementing
regulations of the federal banking agencies. The OCC
and the other federal banking agencies participated in
several meetings discussing relevant provisions of the
Model Act. We offered suggestions based on our experi¬
ences in supervising national banks and found the pro¬
cess initiated by Director Shapo to be open, collegial, and
very constructive. As a result, we believe that the draft
Model Act will reflect an important and precedential con¬
sensus between the state insurance regulators and fed¬
eral bank regulators regarding the implementation of
GLBA and the protection of consumers.
The OCC's Work with the SEC
The OCC also has developed a number of information¬
sharing arrangements with the Securities and Exchange
Commission (SEC). For example, we make referrals to the
SEC when the OCC discovers potential violations of the
federal securities laws. 1 We share relevant information on
the alleged violation with the SEC, and coordinate with the
SEC’s investigation and enforcement proceedings. The
OCC’s participation includes making available to the SEC
1 The OCC has similar agreements to refer potential violations of
law with the Department of Labor for potential violations of ERISA,
and the federal Elections Commission for potential violations of fed¬
eral elections law.
46 Quarterly J ournal, Vol. 20, No. 2, J une 2001
our bank examination reports and other confidential ex¬
amination information. We also provide bank examiners to
assist the SEC in reviewing OCC materials, and to testify
for the SEC in its enforcement proceedings.
We make access requests to the SEC for its investigatory
and examination information when this information is rel¬
evant to the OCC's bank supervision responsibilities. We
also request information from the SEC that may be rel¬
evant to pending licensing applications under consider¬
ation by the OCC, including new bank charter
applications and notices of change in bank control.
We have shared information with the SEC on customer
complaints received by the OCC when the complaints
involve matters that may be subject to the SEC's authority.
We have also received information on customer com¬
plaints from the SEC related to national banks. For ex¬
ample, we have shared customer complaint information
with the SEC in cases involving investment product sales
to bank customers, and in cases related to sales of
brokered certificates of deposit.
When requested by the SEC, we advise the SEC of the
existence of OCC enforcement actions on national bank
affiliates of publicly traded bank holding companies, in
connection with the SEC's review of securities disclosures
made by the holding companies. Staff of the SEC’s Divi¬
sion of Corporation Finance have made arrangements to
routinely request information on OCC enforcement actions
in connection with the SEC staff's review of securities dis¬
closure filings made by publicly traded bank holding com¬
panies. The SEC staff uses this information to verify the
accuracy and completeness of public disclosures made
by these bank holding companies. For example, in the
past the SEC staff formed a task force to focus on the
accuracy of bank holding company securities disclosure
filings related to loan losses, and the SEC staff made
requests to the OCC for information on hundreds of na¬
tional banks as part of this initiative.
Finally, we have been working with the SEC to implement
GLBA's new functional regulation provisions as they per¬
tain to national banks' securities activities. We have had
several meetings with the SEC’s senior staff responsible
for examinations of broker-dealers and investment compa¬
nies to discuss each agency’s views of GLBA's functional
regulation provisions. Our discussions have covered a re¬
view of the scope of examinations conducted by the
agencies. We are also in the process of identifying the
types of information sharing between the agencies that
would serve to facilitate functional regulation.
We also coordinate with the SEC in connection with the
OCC's authority over national banks acting as transfer
agents, municipal securities brokers and dealers, and
government securities brokers and dealers. We routinely
share examination information with the SEC on national
banks that are registered transfer agents. We also have
coordinated enforcement actions in the past related to
transfer agents and government securities dealers. We
have shared information on municipal securities dealers,
including in cases involving compliance with the rules on
political contributions by municipal securities profession¬
als.
Finally, we have entered into an “Agreement in Principle”
with the National Association of Securities Dealers cover¬
ing information sharing on broker-dealers that are involved
in selling investment products through banks.
The OCC's Work with the Federal
Banking Agencies
We work in close coordination and cooperation with the
other three federal banking agencies—the Federal Re¬
serve, FDIC, and OTS—in virtually every significant as¬
pect of our regulation and supervision of national banks.
Coordination among the agencies has increased in recent
years. Over the last 10 years, Congress has increasingly
directed the agencies to work together to write implement¬
ing regulations for new legislation. Moreover, industry con¬
solidation has resulted, in many instances, in banking
organizations containing multiple charters that are super¬
vised by different agencies. Few major supervisory or
policy initiatives are today taken by one of the banking
agencies without consultation with the others. In many
cases, these initiatives are undertaken jointly by the four
agencies even when there is no express statutory require¬
ment to do so.
For this reason, it is difficult to catalog all of the ways in
which the agencies coordinate and share information. I
will, however, highlight a few of the more important areas
where we work cooperatively with the other banking agen¬
cies on law enforcement matters. As you will note in the
description that follows, the methods that the banking
agencies use to share information differ depending on the
level of sensitivity of the information.
The most widely available type of information is informa¬
tion pertaining to final enforcement actions, that is, actions
initiated by one of the banking agencies pursuant to its
enforcement authority 2 that result either in an order issued
by the head of an agency after the matter has been liti¬
gated or in a consent order or agreement entered into by
the parties.
2 See generally 12 USC 1818 (enforcement authorities of the four
federal banking agencies).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 47
Copies of final formal enforcement actions are required by
statute to be made public. 3 The banking agencies sepa¬
rately share copies with one another. Moreover, the four
banking agencies each maintain a searchable database,
available on each agency's Internet Web site, that en¬
ables anyone to enter an individual’s or bank's name and
obtain information indicating whether that person has
been the subject of a final enforcement action. Each
banking agency's Web site is linked to the Web sites of
other financial institutions’ regulators, where similar infor¬
mation is available about actions taken by those agen¬
cies. For example, by logging on to the OCC's Web site, 4
the Internet user can search the OCC's database of for¬
mal enforcement actions by party name or by bank name
to find out if we have taken final action against a particular
individual or bank. An electronic link is also provided to
the sites of the Federal Reserve, the FDIC, the OTS, the
National Credit Union Administration (NCUA), and the
SEC to enable the user to search for similar enforcement
information on each of those sites.
The four banking agencies also share information with
each other when formal enforcement actions are initiated,
including when an agency issues a notice of charges
based on its statutory enforcement authority. Information
about the initiation of informal enforcement actions also is
shared among the agencies if, for example, the bank that
is the subject of the enforcement action is affiliated with
an institution directly regulated by one of these agencies.
Finally, when appropriate on a case-by-case basis, the
OCC provides supervisory and enforcement information to
staff at the Federal Reserve, the OTS, and the FDIC. This
information about the initiation of enforcement proceed¬
ings is not publicly available.
Certain information that is not public may, however, be
made available to federal agencies other than the federal
banking agencies and to state agencies under certain
circumstances. For example, OCC regulations authorize
the sharing of nonpublic supervisory information to other
federal and state agencies when not otherwise prohibited
by law, and the information sought is in furtherance of the
performance of the requesting agency's official duties. 5
Utilizing this regulatory mechanism, the OCC regularly
provides access to certain confidential supervisory infor¬
mation to other federal and state law enforcement and
regulatory agencies. 6 In addition, under the new model
3 See 12 USC 1818(u).
4 The Internet address for this searchable database is http://
www.occ.treas.gov/enforce/enf_search.htm.
5 See 12 CFR 4.37.
6 Consistent with OCC regulations on the sharing of nonpublic
supervisory information, the OCC has entered into a number of
information-sharing agreements with other federal and state agen-
agreement to share information with state insurance regu¬
lators that I have previously described, the OCC will notify
the state insurance regulator of any enforcement action it
takes against a national bank that has a resident insur¬
ance license in that state if the action relates to activities
the insurance regulator supervises or has the authority to
examine, or if the activity at issue poses a material risk to
the operations or financial condition of a regulated entity
that the insurance regulator supervises. Likewise, the
state insurance regulator will notify the OCC of any en¬
forcement action it takes, or that it knows has been taken
by another state insurance regulator, against a regulated
entity that the OCC supervises or that poses a material
risk to the operations or financial condition of a regulated
entity that the OCC has the authority to examine.
In addition, information reported on the Suspicious Activity
Reports (SARs) electronic database is available to federal
law enforcement agencies, the federal banking agencies,
and to state law enforcement and bank supervisory au¬
thorities. A SAR is a standardized form for reporting cer¬
tain illegal or suspicious activities. Depository institutions,
including national banks, state-chartered banks, federal
and state-chartered thrifts, and federal credit unions, are
required to file SARs when they detect a known or sus¬
pected violation of federal law, a suspicious transaction
related to a money-laundering activity, or a violation of the
Bank Secrecy Act. 7 Thus, the principal purpose of the
SARs database is to catalog for criminal law enforcement
authorities any suspicious activity and possible illegal
conduct being perpetrated against, or utilizing, financial
institutions. SARs are filed with the Financial Crimes En¬
forcement Network of the Department of the Treasury
(FinCEN) and maintained in an electronic database.
FinCEN is a co-owner of the database with the federal
cies. In 1984, the federal banking agencies entered into a Joint
statement of Policy on the Interagency Exchange of Supervisory
Information to share certain confidential or privileged supervisory
information, and to make this information available to relevant state
supervisory authorities. In 1986, the OCC authorized each of the
OCC’s district offices to execute separate sharing agreements with
state supervisory authorities seeking access to nonpublic supervi¬
sory information. See OCC Policies and Procedures Manual, PPM
6100-3 (REV), January 22, 1986. The federal banking agencies'
most recent interagency sharing arrangement, in 1997, addressed
the notification of enforcement actions among the federal banking
agencies. See Revised Policy statement on “Interagency Coordina¬
tion of Formal Corrective Action by the Federal Bank Regulatory
Agencies,” 62 Fed. Reg. 7782 (February 20, 1997).
7 See, e.g., 12 CFR 21.11 (OCC regulation prescribing SAR filing
requirements). The Bank Secrecy Act authorizes the Secretary of
the Treasury to require “any financial institution, and any director,
officer, employee, or agent of a financial institution, to report any
suspicious transaction relevant to a possible violation of law or
regulation.” 31 USC 5318(g). The term “financial institution” is
broadly defined in that law to include a wide variety of persons and
entities whose business involves monetary transactions. See 31
USC 5312(a) (definition of “financial institution”).
48 Quarterly J ournal, Vol. 20, No. 2, J une 2001
banking agencies, and maintains and manages the SAR
database pursuant to an agreement with the OCC, the
Federal Reserve, the FDIC, the OTS, and the NCUA. That
agreement permits FinCEN to share access to the data¬
base with other federal and state law enforcement agen¬
cies and regulators upon securing a written commitment
to maintain confidentiality of the information and to safe¬
guard its use. In general, the SAR system is used to pro¬
vide leads for law enforcement agencies and for banking
agencies to identify situations that may warrant initiation of
formal enforcement actions to remove and prohibit indi¬
viduals from banking.
III. Key Issues in Developing New
Legislation
Based on our experience working and sharing information
with federal and state regulators, I would like to highlight
two areas which, in our view, present critical issues re¬
garding the design of any new system for enhanced
enforcement-related information sharing among functional
regulators. The first is the need to ensure that disclosure
is not prohibited or restricted by federal law and, if autho¬
rized, that agency and bank (and other regulated entities)
privileges are properly preserved. The second is to recog¬
nize that expanded information sharing can raise very
sensitive issues regarding the nature and reliability of the
information collected and how that information is used,
which need to be very carefully considered in the design
of an expanded information-sharing system.
1. Authorized Disclosure and Preservation of
Privileges
The ability of the OCC and the other federal banking
agencies to disseminate nonpublic information to other
federal and state agencies currently is limited by the re¬
strictions contained in certain federal statutes, and also by
the necessity of preserving privileges recognized under
federal statutes and state common law. This nonpublic
information falls into two general categories: privileged
and confidential information obtained in the furtherance of
the OCC's supervisory and examination authority from or¬
ganizations that the OCC supervises; and privileged and
confidential information internally prepared or generated
by the OCC.
Among the federal statutes that prohibit or restrict the
OCC from transferring nonpublic information are the Trade
Secrets Act, the Right to Financial Privacy Act, and the
Privacy Act of 1974. 8 In the absence of an express statu-
8 The appendix contains a brief description of these three federal
laws.
tory exception, these laws prohibit or restrict certain types
of nonpublic information from being shared with other fed¬
eral and state agencies. Moreover, even if a statutory ex¬
ception applies, a number of statutory and common law
privileges recognized by the courts and available to the
OCC may be waived or destroyed by the unprotected
disclosure of privileged information. These include the
bank examination privilege, 9 the deliberative process
privilege, the self-evaluative privilege, and the attorney-
client and work-product privileges.
Any statutory authorization to share confidential or privi¬
leged information with state agencies or other entities
needs to appropriately address the foregoing statutory
prohibitions as well as to ensure protection of all available
privileges. Currently, a provision in the Federal Deposit
Insurance Act expressly protects transfers of privileged
information from, among others, the federal banking agen¬
cies to other federal government agencies. 10 The provi¬
sion does not address the sharing of privileged materials
with state agencies, such as state banking authorities,
however. Although GLBA separately provides that infor¬
mation exchanged pursuant to its section 307(c) 11 by a
federal banking regulator or a state insurance regulator
will not constitute a waiver, or otherwise affect, any privi¬
lege to which the information is subject, section 307 per¬
tains only to information regarding transactions or
relationships between an insured institution and an affili¬
ated company that is engaged in insurance activities and
to certain other information that a banking agency be¬
lieves is necessary or appropriate for a state insurance
regulator to administer state insurance laws. It also does
not cover information sharing with the NAIC. Thus, under
current law, sharing of confidential or privileged informa¬
tion with state agencies and the NAIC runs the risk of
resulting in a loss of protected status to the privileged
materials.
It is also essential to protect the privileges that banks may
assert over their own information that is in the possession
of the federal banking agencies. Since banks have no
discretion as to the information they must disclose to su¬
pervising agencies, 12 the authority for bank examiners to
enter upon bank premises and review all of a bank's
books and records is plenary. Thus, self-evaluative,
9 See 12 USC 481.
10 12 USC 1821 (t). The agencies covered by this protection are
the OCC, the Federal Reserve, the FDIC, the OTS, the Farm Credit
Administration, the Farm Credit System Insurance Corporation, the
NCUA, and the General Accounting Office.
11 GLBA, sec. 307(c), to be codified at 15 USC 6716(c).
12 For the statutory provisions requiring institutions to provide in¬
formation to their regulators, see 12 USC 248 (Federal Reserve),
481 (OCC), 1820 (FDIC), 1464(d) (OTS), and 1784(a) (NCUA).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 49
attorney-client and work-product communications main¬
tained anywhere in a bank's books and records fall prop¬
erly within the scope of the banking agencies’
examination authority and may be shared with the exam¬
ining agency by the supervised institution. Such informa¬
tion in the hands of the federal banking agencies remains
privileged because it was obtained through statutory com¬
pulsion. Similarly, the sharing of such privileged informa¬
tion among the federal banking agencies remains
protected under 12 USC 1821 (t). However, the subse¬
quent sharing of this privileged information with state
agencies, without federal statutory protection, could result
in the waiver of a financial institution’s privileges. This, in
turn, could compromise an institution’s legal position and
potentially adversely impact its safety and soundness.
2. Protect Privacy and Confidentiality by Limiting
the Types of Information that Can Be Widely
S hared
Information systems obviously create different concerns
depending on the level of sensitivity and reliability of the
information they contain. In our view, it would be very
beneficial to establish a system for sharing and electronic
access to information concerning enforcement actions
taken by the banking agencies and comparable enforce¬
ment actions taken by other functional regulators. Such a
system would enable regulators to identify individuals and
entities with records that are relevant when those individu¬
als or entities seek to affiliate with new entities or conduct
new types of businesses. In the case of depository insti¬
tutions, information on final enforcement actions is avail¬
able to the public pursuant to 12 USC 1818(u), and,
therefore, would not raise confidentiality or privacy con¬
cerns.
Sharing nonpublic information about banks and individu¬
als does raise confidentiality and privacy concerns that
are particularly serious, since the information could vary
considerably, and may be preliminary or unsubstantiated.
All of the federal banking agencies from time to time re¬
ceive preliminary information that raises suspicions of ille¬
gal activity. Disclosure to other regulators of preliminary
suspicions, the reliability of which could vary widely,
would raise significant privacy issues, including the dis¬
semination of potentially inaccurate accusations against
individuals or institutions that could cause unwarranted
harm to the reputation of the individual or the bank. Dis¬
closure of preliminary information also could hamper on¬
going investigations by law enforcement agencies or
federal banking agencies and might even expose agen¬
cies to potential liability for falsely accusing individuals or
institutions.
For example, the SAR system I have described, by defini¬
tion, contains information about “known or suspected” vio¬
lations of federal law and about “suspicious transactions”
related to money laundering or violations of the Bank Se¬
crecy Act. By its nature, information reported on a SAR is
preliminary or unsubstantiated. We need to be very care¬
ful that any new system of information sharing does not
taint individuals or entities based upon mere suspicion or
allegation.
On the other hand, sharing nonpublic information after an
agency has formally determined to initiate an action, has
gathered its supporting documentation, and has issued a
Notice of Charges, reduces the risks to confidentiality and
privacy. If such non-public information were shared only
with other federal and state agencies, this information
would remain outside of the public arena. At the same
time, since Notices of Charges are fully developed and
based on an agency's extensive investigation, they can
safely be viewed as relevant by other agencies with a
supervisory or law enforcement interest in the individual or
institution.
For these reasons, we respectfully urge that legislation
focus on enhancing the availability to relevant federal and
state agencies (and the NAIC on behalf of state insurance
supervisors) of information regarding final enforcement
and disciplinary actions. If information availability were to
be expanded beyond those actions, we would urge that it
focus on formally commenced enforcement actions by the
participating federal and state agencies. Such a system
would be very useful to functional regulators and would
not present the information reliability and privacy issues
that would arise if broader categories of unsubstantiated
information were included.
This approach also would make it unnecessary to create
any new governmental entity to manage information shar¬
ing among functional regulators. A meaningful level of in¬
formation exchange already exists among federal
financial institutions regulators and state regulators,
though the information is not as complete or as readily
accessible as is desirable. In our view, the current sys¬
tems represent a good starting point, and Congress could
direct the relevant agencies to build on what currently
exists, to create a linked system containing public infor¬
mation on enforcement actions taken, with the limited ad¬
dition of nonpublic information concerning the issuance of
Notices of Charges (or comparable actions), as I have
described, and with provision for the role of the NAIC on
behalf of the state insurance supervisors in that process.
That directive, coupled with the necessary protections to
preserve privileges and ensure that confidentiality and pri¬
vacy are protected, would be a significant aid to coopera¬
tive law enforcement among federal and state regulators
of financial services providers, and would not require the
creation of any new bureaucracy to oversee this activity.
This would be more effective, in our view, than creating a
50 Quarterly J ournal, Vol. 20, No. 2, J une 2001
new organization, such as a new body within of the Fed¬
eral Financial Institutions Examination Council, to assume
and manage this function.
IV. Conclusion
Madam Chair, Mr. Chairman, and members of the sub¬
committees, let me state again the appreciation of the
OCC that the subcommittees are addressing these is¬
sues. You have identified an important area, where en¬
hanced information sharing between functional regulators
can enhance the integrity of the industries that we regu¬
late. Many of the issues in this area can be quite complex,
and we would be happy to work with the subcommittees
and their staff to provide technical assistance as you pre¬
pare specific legislative proposals.
I would be happy to answer your questions.
Appendix
Federal Statutes Affecting Information
Sharing
The following laws place restrictions on transfers of infor¬
mation made by federal agencies.
• The Trade Secrets Act (18 USC 1905). This law prohib¬
its federal agencies and personnel from disclosing
specified information unless the disclosures are autho¬
rized by law. The information subject to this prohibition
“concerns or relates to the trade secrets, processes,
operations, style of work, or apparatus, or to the iden¬
tity, confidential statistical data, amount or source of
any income, profits, losses, or expenditures by any per¬
son, firm, partnership, corporation, or association.” Per¬
sons disclosing these types of information without req¬
uisite authority may be fined, imprisoned, and removed
from federal service.
It is unsettled whether inter-agency transfers are disclo¬
sures subject to the Trade Secrets Act. 13 Department
of Justice opinions reflect that, in addition to express
statutory authorization, lawful sources of disclosure au¬
thority under the Trade Secrets Act may arise from,
13 Compare Shell Oil Co. v. Department of Energy, 447 F. Supp.
(1979), affirmed 631 F.2d 231 (3d Cir. 1980) (inter-agency transfer
held to constitute disclosure) with Emerson v. Schlesinger, 609 F.2d
898 (8th Cir. 1979) (TSA was designed to apply only to public
disclosures).
among other sources, an agency's substantive regula¬
tions or necessary statutory implication. 14
• The Privacy Act of 1974 (5 USC 552a). This law re¬
stricts federal agencies' collection and dissemination of
information about individuals. Under this law, an
agency may collect and maintain information about an
individual only if it is relevant and necessary to accom¬
plish a purpose of the agency that is required to be
accomplished by statute or executive order. Disclosure
of such information may not generally occur without the
consent of the information’s subject. However, 12 statu¬
tory exceptions to the principle of “no disclosure with¬
out consent” exist. Of these, two have relevance to and
may authorize the transfer of information about an indi¬
vidual to other federal or state agencies. Under the first
of these exceptions, disclosure may occur pursuant to
a routine use if the use is compatible with the purposes
for which records about an individual are maintained.
Additionally, if requested in writing by a federal or state
agency for an authorized civil or criminal law enforce¬
ment purpose, disclosure may also occur.
• The Right to Financial Privacy Act (12 USC 3401-
3422) (RFPA). While the focus of the Privacy Act is on a
broader category of information about individuals, the
RFPA applies only to information obtained from a finan¬
cial institution’s records pertaining to an individual cus¬
tomer’s relationship with the institution. With respect to
this information, federal agencies are generally limited
in the means through which this information may be
obtained from an institution. However, specific provi¬
sion is made in the RFPA for examinations conducted
by the federal financial regulatory agencies.
Once information is obtained by a federal agency, it
may not generally be transferred to another without no¬
tice of the transfer being provided to the customer.
However, certain transfers are exempt from this general
requirement. Included among these exemptions are
transfers: (1) between two designated supervisory
agencies having statutory examination authority with
respect to the same institution; 15 (2) among and be¬
tween FFIEC members and the SEC; 16 (3) sought by a
federal agency in connection with an investigation or
examination of a financial institution; 17 and (4) required
by law. 18
14 41 Op. Att’y Gen 106 (1953) (authority to make disclosures
implied from statutory mandate to liquidate the RFC); 5 Op. Off.
Legal Counsel 255 (1981) (summarization of sources of TSA disclo¬
sure authority).
15 12 USC 3412(d).
16 12 USC 3412(e).
17 12 USC 3413(h)(1).
18 12 USC 3413(d).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 51
Interpretations—J anuary 1 to March 31, 2001
Interpretive Letters
Laws
12 USC 24(7).
12 USC 25a(a).
12 USC 36J.
S ubjects
Page
. 51 1
Letter No. Page
Participation in lotteries by national banks.
Retention of shares of common stock.
issouri loan production offices
ebt suspension products for credit card members .
Proposal to engage in finder activit
etention of stock converted from mutual life insurance policy.
Preemption of state or local law prohibiting national bank ATM access fees
Quarterly J ournal, Vol. 20, No. 2, J une 2001 53
Interpretive Letters
Interpretive Letter No. 900—
J une 19,2000
12 USC 25a(a)
Subject: Participation in Lotteries by National Banks
Dear [ ]:
This is in response to your letter of June 13, 2000, re¬
questing confirmation that certain activities would not
cause your client to be in violation of 12 USC 25a, which
prohibits lottery activities by national banks. As we re¬
cently discussed on the telephone, it is my opinion that
the described activities would not be prohibited by this
statute.
According to your letter, your client, a national bank (“the
bank”), has a branch in a town that wishes to hold a raffle
to raise funds for the construction of a new community
building. The bank would like to donate a print for this
effort, and this will be the only item in the raffle. Lottery
tickets will be sold by local merchants, who will also pub¬
licize the lottery on their premises. The bank will not sell
any lottery tickets, nor will it allow its premises to be used
to publicize the lottery. Understandably, though, the bank
would like to receive credit for donating the print. There¬
fore, you asked if the bank could be identified as the
donor of the item in the lottery advertising that will be
displayed in local stores or elsewhere not on bank pre¬
mises. Specifically, you asked whether identifying the
bank as the donor would violate the statutory prohibition
on publicizing of a lottery by national banks.
Twelve USC 25a generally prohibits national banks from
involvement in lotteries. The portion relevant to your in¬
quiry provides that “a national bank may not ... an¬
nounce, advertise, or publicize the existence of any
lottery." 12 USC 25a(a). It seems clear that this language
requires some affirmative action by a national bank to
publicize a lottery, for example, by displaying advertising
on its premises. You have represented that no lottery pub¬
licity will be displayed on bank premises.
In my view, simply noting on an advertisement that the
bank has donated the item to be raffled would not consti¬
tute action by the bank to publicize the lottery, provided
the bank has no involvement with the sponsoring or dis¬
play of the advertisement. From the bank's standpoint, the
situation you describe is no different than a newspaper
article or television story reporting that the bank has do¬
nated the item. To attribute such third party activities to
the bank would be to impose vicarious liability upon the
bank for the acts of others, which is not authorized by the
language of the statute.
Since it does not appear that there will be any affirmative
action by the bank to publicize the lottery, I conclude that
the facts you describe would not cause the bank to violate
the prohibition of 12 USC 25a against publicizing a lottery,
or any other provision of that statute. This opinion is
based on the representations made in your letter, and any
material change in the facts could lead to a different con¬
clusion.
I trust that this has been responsive to your inquiry. If you
have further questions, please feel free to contact me at
(202) 874-5300.
Christopher C. Manthey
Senior Attorney
Bank Activities and Structure Division
Interpretive Letter No. 901—
J une 29,2000
12 USC 24(7)
Dear [ ]:
This is in response to your letter of March 23, 2000, ad¬
dressed to William B. Glidden, Assistant Director, Bank
Activities and Structure Division. You related that your cli¬
ent, [ ] (“the bank”), owns a number of life insurance
policies issued by [ ] Insurance Company. These poli¬
cies cover various officers and employees of the bank.
Due to the planned “demutualization,” or conversion to
stock form, of [ ], the bank was scheduled to receive a
certain number of shares of [ ] common stock. You re¬
quested confirmation that the bank may retain these
shares of stock.
You represented that the bank purchased the life insur¬
ance policies for purposes that the OCC has found to be
incidental to banking under 12 USC 24(Seventh), and in
accordance with the guidance contained in OCC Bulletin
96-51, “Bank Purchases of Life Insurance.” When a mu¬
tual life insurance underwriter converts to stock form,
which has become relatively common in recent years,
shares in the new company are distributed to the policy¬
holders based on the amount of insurance that they own.
Under these circumstances, the bank's receipt of the
stock is probably most properly characterized as a
byproduct of the permissible activity of purchasing life
insurance for the bank’s needs, and not as a “purchase”
Quarterly J ournal, Vol. 20, No. 2, J une 2001 55
of stock within the meaning of 12 USC 24(Seventh). More¬
over, the bank's retention of this stock does not raise any
safety and soundness concerns, according to examining
personnel who have considered it.
Accordingly, the OCC does not object to retention of the
[ ] stock by the bank. I trust that this has been respon¬
sive to your inquiry. If you have further questions, please
feel free to contact me at (202) 874-5300.
Christopher C. Manthey
Senior Attorney
Bank Activities and Structure Division
Interpretive Letter No. 902—
November 16, 2000
12 USC 36J
Subject: [ ]—Missouri Loan Production Offices
Dear [ ]:
This is in response to your inquiry concerning [ ], a divi¬
sion of [bank name, city, state] (“the bank”). Mr. Gregory
Omer, Chief Counsel of the Missouri Department of Eco¬
nomic Development, Division of Finance, has informed
you that it is his belief that [ ]’s offices in that state are in
violation of Missouri regulation 4 CSR 140-6.075. This
regulation contains activity restrictions and reporting re¬
quirements for loan production offices (LPOs), and pur¬
ports to apply to both state and national banks. You
believe that, as a division of a national bank, [ ] is not
subject to this regulation, and requested a letter setting
forth our views on this matter. Mr. Omer is aware that you
have requested our views, and we understand that you
will be providing a copy of this response to him.
The bank has established no branches in Missouri but,
through [ ], operates LPOs in several locations in that
state. These offices originate consumer-oriented loans
such as home equity loans and other secured loans. They
also purchase retail installment sales contracts from vari¬
ous dealers. [ ] does not offer unsecured loans in Mis¬
souri, although it does in other states. All loan applications
are underwritten using the bank's centrally developed and
applied consumer loan credit standards. The final deci¬
sion to approve or deny a loan is made by a loan officer
at the LPO based upon these standards, with certain au¬
thority to make exceptions based upon personal judg¬
ment.
No processing of loan payments is performed at these
offices. Borrowers are directed to mail loan payments to a
postal lockbox. However, loan payments are sometimes
brought to a [ ] office in spite of these instructions, and
in that event, [ ] personnel simply mail the payments to
the lockbox address. You asked us to address the permis¬
sibility of loan approval and receipt of loan payments at
an LPO.
It is well settled that national banks may conduct business
without geographic restrictions unless Congress provides
otherwise. Clarke v. Securities Industry Association, 479
U.S. 388 (1987); NBD Bank, N.A. v. Bennett, 67 F.3d 629
(7th Cir. 1995); Independent Insurance Agents of
America, Inc. v. Ludwig, 997 F.2d 958 (D.C. Cir. 1993).
The establishment of branches is one of the few areas
where Congress has provided such an exception. Twelve
USC 36 incorporates state geographic restrictions on the
establishment and location of national bank branches,
and requires authorizing state legislation in the case of de
novo interstate branches. Missouri has not authorized de
novo interstate branching and considers the LPOs to be
impermissible branches of the bank. However, under fed¬
eral law, nonbranch national bank facilities such as LPOs
are not subject to state geographic restrictions. Hence,
the disagreement in this case is about whether [ ]’s of¬
fices in Missouri are “branches” under federal law so as
to be subject to state geographic requirements.
The Missouri regulation provides, in relevant part:
Loans which are originated at a loan production office
must be approved or denied at the main office or
branch office of the lending bank and the proceeds of
these loans must be disbursed from the main office or
a branch office of the lending bank; disbursement may
not be effected by or through the loan production of¬
fice. No payments may be accepted at a loan produc¬
tion office.
Mo. Code Regs. Tit. 4, 140-6.075(2) (1993). Missouri con¬
tends that if a loan production office does not observe
these activity limitations, it is a branch.
However, while Missouri may define a “branch” for pur¬
poses of state law, the definition of a national bank
“branch” is governed by federal law. First National Bank
in Plant City v. Dickinson, 396 U.S. 122 (1969). Federal
law defines a branch as any facility established by a na¬
tional bank “at which deposits are received, or checks
paid, or money lent.” 12 USC 36(j). (Automated teller ma¬
chines and remote service units are specifically excluded,
but they are not at issue here.) A national bank facility that
does not fit this definition, such as a loan production of¬
fice, is not a branch under federal law and therefore is not
subject to state geographic restrictions. First National
Bank of McCook v. Fulkerson, No. 98-D-1024 (D. Colo,
filed March 7, 2000); see Interpretive Letter No. 821,
56 Quarterly J ournal, Vol. 20, No. 2, J une 2001
[1997-1998 Transfer Binder] Fed. Banking L. Rep. (CCH)
If 81-271 (February 27, 1998) (ATMs); Bank One Utah,
N.A. v. Guttau, 190 F.3d 844 (8th Cir. 1999), cert, denied,
146 L. Ed. 2d 641 (2000) (same). As the primary regulator
of national banks, the OCC interprets the definition of
“branch” under 12 (JSC 36 (the McFadden Act).
The Missouri regulation treats loan approval as a branch¬
ing activity, that is, a function that must be performed at a
main office or branch and cannot be performed at an
LPO. OCC regulations provide that a national bank loan
origination facility will not be considered a branch //the
loans are approved at the bank's main office or a branch.
12 CFR 7.1004. Flowever, this regulation is a safe harbor,
not a legal requirement. OCC Interpretive Letter No. 634,
reprinted in [1993-1994 Transfer Binder] Fed. Banking L.
Rep. (CCFI) f 83,518 (July 23, 1993) (discussing the al¬
most identically worded predecessor of the current regu¬
lation). In other words, while that is one possible way for a
bank to structure its lending operations, the OCC recog¬
nizes that loan approval may also take place at other
locations without violating branching restrictions. This po¬
sition is embodied in our regulation at 12 CFR 7.1005.
Credit underwriting is essentially a back office function,
and has become even more so as modern technology
has made it possible for loan “approval” functions to be
performed virtually anywhere, based on pre-established
criteria, with the results communicated instantly to any¬
place else. Therefore, the physical location where loan
“approval” takes place may have little significance in to¬
day's world. Moreover, the core branching function that is
required under the McFadden Act is “making” loans. It is
apparent that neither loan origination nor the technical act
of loan approval, taken separately, constitutes the making
of a loan. Interpretive Letter No. 634, supra. Performing
two nonbranching functions at the same location does not
change the nonbranching character of either. First Na¬
tional Bank of McCook v. Fulkerson, No. 98-D-1024 (D.
Colo, filed March 7, 2000); 12 CFR 7.4005; OCC Interpre¬
tive Letter No. 691, reprinted in [1995-1996 Transfer
Binder] Fed. Banking L. Rep. (CCFI) f 81-006 (Septem¬
ber 25, 1995). It follows that loan approval may take place
at any location, including an LPO, without making that
location a branch under federal law. OCC Interpretive Let¬
ter No. 667, reprinted in [1994-1995 Transfer Binder] Fed.
Banking L. Rep. (CCFI) If 83,615 (October 12, 1994). 1 In
1 The OCC formerly took the position that the “aggregation" of
loan origination and approval at one location was the functional
equivalent of making a loan under the McFadden Act. See, e.g.,
OCC Interpretive Letter No. 343, reprinted in [1985-1987 Transfer
Binder] Fed. Banking L. Rep. (CCH) f 85,513 (May 24, 1985). The
Missouri regulation appears to reflect the same view. For the rea¬
sons discussed above, the OCC abandoned this position in OCC
Interpretive Letter No. 667, supra. It is possible that the Missouri
regulation was originally based on OCC positions but has not been
revised to reflect subsequent developments.
the present situation, because loans in Missouri are un¬
derwritten using consumer loan credit standards centrally
developed and applied by the bank for its consumer lend¬
ing business, we think it is particularly inappropriate to
view the loan as “made” in Missouri.
You also asked us to address the issue of receipt of loan
payments at LPOs. The Missouri regulation also treats this
as a branching activity. But while Missouri is free to take
this position as a matter of state law, in our view, the
activities in question are not a branching function within
the meaning of 12 USC 36(j), and clearly would not be so
based on the facts of the present situation, where loan
payments at LPOs are proffered by customers even
though the bank has instructed the customer to pay in a
different manner.
One court has characterized the repayment of loans as a
“deposit,” a core banking function under the McFadden
Act. Independent Bankers Association of America v.
Smith, 534 F2d 921, 941 (DC Cir.), cert, denied, 429 US
862 (1976). Flowever, the Supreme Court has emphasized
that statutes should be interpreted in accordance with
their plain language. See, e.g., Mansell v. Mansell, 490
US 581 (1989). Clearly, in adopting the definition of
“branch” in 12 USC 36, Congress distinguished between
deposit-taking functions and loan functions and, in the
context of lending, identified the lending of money—not
the repayment of money loaned—as the branching func¬
tion. Nevertheless, even assuming the continued viability
of the Smith decision on this point, the present case is
distinguishable.
As the Supreme Court has recognized, what is relevant in
construing whether a facility is a branch is whether it
might give the bank “an advantage in its competition for
customers.” First National Bank in Plant Cityv. Dickinson,
396 US at 136-37. Potential borrowers do not select a
lender based on where they can make loan payments;
most borrowers make loan payments through the mail.
[ ] borrowers are instructed to mail their loan payments
to a designated lockbox address, and loan payments are
only brought to a [ ] office if customers do not follow the
established procedures. Thus, the number of such pay¬
ments is limited, and is the result of actions by the cus¬
tomer, not by the bank. Even then, the payments are not
processed, but are simply mailed to the proper address.
Such limited functions, performed solely to accommodate
customers, should not be equated with receiving and pro¬
cessing loan payments as a normal business practice.
We therefore conclude that under such circumstances,
the receipt of loan payments at the bank's LPO facility
does not cause that facility to be a branch of the bank
under 12 USC 36.
There is one other aspect of the Missouri regulation upon
which we would like to comment. Paragraph (3) of the
Quarterly J ournal, Vol. 20, No. 2, J une 2001 57
regulation requires that all banks, including national
banks, must report annually to the state commissioner of
finance the location of each loan production office; the
volume of income generated by each office; the number
of officers and other personnel employed at each location;
and the address at which loans are approved or denied,
and disbursement made. The right to operate an LPO is
conditioned upon compliance with these requirements.
Mo. Code Regs. Tit. 4, 140-6.075(3) (1993).
State regulations are not preempted when Congress ac¬
companies a grant of an explicit power with an explicit
statement that the exercise of that power is subject to
state law. Bank One Utah , N.A. v. Guttau , 190 F3d at
848. However, where Congress has not expressly condi¬
tioned a national bank power upon a grant of state per¬
mission, ordinarily, no such condition applies. Barnett
Bank of Marion County v. Nelson , 517 US 25, 34 (1996).
As explained earlier, Congress has not made state law
applicable to the establishment of national bank facilities
except in the case of branches. Moreover, these regula¬
tory conditions appear to give Missouri visitorial 2 powers
over national banks, at least with respect to LPOs. The
OCC is the primary regulator of national banks and, un¬
less otherwise expressly provided by federal law, has the
sole visitorial and enforcement authority over them. 12
USC 484; 12 CFR 7.4000; Guthrie v. Harkness, 199 US
148 (1905).
To summarize, we conclude that loans may be approved,
and loan payments may be forwarded to the proper ad¬
dress under the circumstances described above, at the
bank's loan production office, and these activities will not
cause the LPO to be a branch of the bank within the
meaning of 12 USC 36. We further conclude that the Mis¬
souri regulation is not applicable to [ ] or the bank, inso¬
far as it attempts to authorize visitorial powers over
national banks, contrary to federal law.
The scope of this letter is confined to the issues of loan
approval, receipt of payments, and the necessity of state
approval, as discussed herein, and we take no position on
any other branching issues that may exist. I hope that you
have found this discussion to be helpful. Please let me
know if we can be of further assistance.
Eric Thompson
Director
Bank Activities and Structure Division
2 “Visitation” is not limited to inspection of books and records, but
includes any act of a superintending official to “inspect, regulate, or
control the operations of a bank to enforce the bank’s observance
of the law.” First Nat’l Bank of Youngstown v. Hughes, 6 F. 737,
740-41 (6th Cir. 1881), appeal dismissed, 106 US 523 (1883). See
12 CFR 7.4000(a)(2).
Interpretive Letter No. 903—
December 28, 2000
12 USC 24(7)
Office of the District Counsel
Northeastern District
1114 Avenue of the Americas, Suite 3900
New York, NY 10036-7780
Voice (212) 790-4010
Fax (212) 790^f058
Re: Debt Suspension Products
Dear [ ]:
This responds to your request that the Office of the Comp¬
troller of the Currency (“OCC”) confirm that [ ] (the
“bank”) may offer its credit card members (“cardholders”)
debt suspension agreements. For the reasons discussed
below, we agree that the proposed activity is permissible
for the bank under Section 24(Seventh) of the National
Bank Act because the activity is part of the expressly
authorized lending function of national banks and also
because it is incidental to the business of banking.
Background
Under the proposed debt suspension agreements, the
bank will agree, in exchange for the payment of a monthly
fee by each participating cardholder, to “freeze” the
cardholder’s account for up to 24 months (up to 3 months
for a leave of absence) in the event that the cardholder
becomes involuntarily unemployed, hospitalized, dis¬
abled, or takes a voluntary leave of absence from work.
While a credit card account is “frozen,” no principal pay¬
ment, finance charges or other fees will be due; no fi¬
nance, late or other charges will accrue; and the bank will
not send any negative report to any credit agency due to
the freeze. During the “freeze,” the cardholder will not be
permitted to use the credit card for additional charges
and will be asked to discontinue preauthorized charges to
the account, e.g., subscription payments. 1 Once a
“freeze” expires, the credit card account will be reacti¬
vated and the cardholder will be required to resume its
minimum monthly payments. Normal rates and fees will
then apply to the account.
1 The initial debt suspension agreements will require the
cardholder to discontinue preauthorized transactions, however, the
bank will monitor the level of such transactions after implementation
of the program in order to evaluate other approaches. If the bank
concludes, after assessing the risk, that there are more “customer
friendly” options to discontinuing preauthorized charges, the bank
may decide to allow some or all of these charges subject to contin¬
ued monitoring.
58 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Participation will be offered to cardholders on an optional
basis. In order to enroll or activate a benefit, the
cardholder’s account must be open and not delinquent.
The bank may also establish a waiting period for new
enrollees before they may claim a debt suspension ben¬
efit. After initial qualification for a deferment benefit, the
cardholder must demonstrate continuing eligibility in order
to continue receiving the benefit. The cardholder may
cancel the agreement at any time and may do so within
30 days of initial enrollment and receive full credit for any
fees charged.
Discussion
A. Business of Banking Relations
The National Bank Act provides that national banks shall
have the power:
[to] exercise ... all such incidental powers as shall be
necessary to carry on the business of banking; by dis¬
counting and negotiating promissory notes, drafts, bills
of exchange, and other evidences of debt; by receiv¬
ing deposits; by buying and selling exchange, coin,
and bullion; by loaning money on personal security;
and by obtaining, issuing, and circulating notes . . .
12 USC 24(Seventh).
The Supreme Court has held that this “powers clause” is
a broad grant of the power to engage in the business of
banking, including the five specifically recited powers and
the business of banking as a whole. See NationsBank of
North Carolina, N.A. v. Variable Life Annuity Co., 513 U.S.
251 (1995) (“VALIC”). Many activities that are not in¬
cluded in the enumerated powers are also part of the
business of banking. Judicial cases reflect three general
principles used to determine whether an activity is within
the scope of the “business of banking”: (1) is the activity
functionally equivalent to or a logical outgrowth of a rec¬
ognized banking activity; (2) would the activity respond to
customer needs or otherwise benefit the bank or its cus¬
tomers; and (3) does the activity involve risks similar in
nature to those already assumed by banks. 2
1. Functionally Equivalent to or a Logical
Outgrowth of Recognized Banking Functions
Lending is one of the expressly enumerated powers in 12
USC 24(Seventh). Part of any lending transaction is the
negotiation of the terms of the obligation, including the
2 See, e.g.. Merchants’ Bank v. State Bank, 77 U.S. 604 (1871);
M&M Leasing Corp. v. Seattle First National Bank, 563 F.2d 1377,
1382 (9th Cir. 1977); American Insurance Association v. Clarke, 865
F.2d 278, 282 (2d Cir. 1988).
interest rate, due dates of payment, etc. Loan agreements
often state the consequences of default, whether those
consequences are penalties, repossession of collateral, or
acceleration of the debt obligation. In the case of a debt
suspension product, the parties have negotiated an op¬
tion for the debtor to cease payments for a time, under
specified circumstances, without adverse consequences.
This type of contractual provision is no less a part of lend¬
ing than any of the various other terms (covenants, secu¬
rity interests, etc.) that are part of a loan agreement. The
authority of a national bank to offer debt suspension prod¬
ucts is, therefore, an inherent part of its express authority
to make loans. 3
Additionally, debt suspension products adjust an out¬
standing obligation of a customer in a way resembling,
but more limited than, a debt cancellation agreement. 4
Like a debt cancellation contract, a debt suspension
product helps to protect the borrower against the risk of
financial hardship in times of adversity. A debt suspension
product simply interrupts the obligation to pay for a speci¬
fied time, rather than cancels it. From the bank’s perspec¬
tive, a debt suspension product provides a mechanism for
the bank to manage and obtain compensation for the
credit risk that it undertakes in making a loan. Thus, it is a
very logical outgrowth of the bank's express lending au¬
thority.
2. Respond to Customer Needs or Otherwise
Benefit the Bank or its Customers
As you note in your letter, a debt suspension product is
finely tuned to the potential duration of financial problems
posed by temporary situations such as involuntary unem¬
ployment and hospitalization. For these types of situa¬
tions, suspension of the debt serves the customer’s need
for relief from financial pressure while also protecting the
bank's interest in the eventual repayment of the obligation.
A customer who otherwise would suffer long-term dam¬
age to his or her credit rating can instead survive a period
of difficulty with his or her standing as a borrower intact.
For the bank, debt suspension products provide a source
of income, from the fees charged for the debt suspension
3 See OCC Interpretive Letter No. 827, reprinted in [1997-1998
Transfer Binder] Fed. Banking L. Rep. (CCH) f 81,276 (April 3,
1998) (confirming the ability of national banks to enter into debt
suspension agreements).
4 The authority of a national bank to offer debt cancellation agree¬
ments is well established. First National Bank of Eastern Arkansas
v. Taylor, 907 F.2d 775 (8th Cir.), cert, denied, 498 U.S. 972 (1990);
12 CFR 7.1013. A national bank may offer debt cancellation agree¬
ments contingent not only on the death of the borrower, but also on
other events such as disability or involuntary unemployment. See
OCC Interpretive Letter No. 640, reprinted in [1993-94 Transfer
Binder] Fed. Banking L. Rep. (CCH) H 83,527 (January 7, 1994).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 59
option, to offset credit losses on credit cards. The agree¬
ments also help both the bank and the customer manage
temporary situations that might otherwise result in default
on the customer’s obligations, thereby enhancing the
bank's ability to eventually obtain repayment from the cus¬
tomer. Additionally, by providing a useful option for cus¬
tomers, debt suspension products could increase the
competitiveness of the bank's credit card offerings.
3. Risks Similar in Nature to Those Already
Assumed by National Banks
In times of financial stress, some borrowers will fail to
repay with or without a debt suspension product. The risk
assumed when a bank provides a debt suspension prod¬
uct is similar to the type of risk that the bank assumes
when it makes a loan or provides a debt cancellation
contract as part of a loan. In any of these situations, the
bank accepts the risk that the borrower may be unable to
repay some or all of the loan. The bank's proposal would
permit the bank to obtain compensation for its assumption
of this risk and the additional cost of temporarily foregoing
the collection of interest.
B. Incidental to the Business of Banking
As the Supreme Court established in the VALIC decision,
national banks are also authorized to engage in an activity
if that activity is incidental to the performance of an activ¬
ity that is part of the business of banking. An activity is
incidental to the business of banking if it is “convenient
and useful” in the conduct of the banking business.
Arnold Tours, Inc. v. Camp , 472 F.2d 427 (1st Cir. 1972).
The OCC and the courts have long authorized national
banks to engage in credit-related activities that protect the
bank and the borrower against a variety of credit-related
risks. The OCC's approvals and court holdings concluded
that these activities are incidental to a bank's lending ac¬
tivities because they protect banks' interest in their loans
by reducing the risk of loss if borrowers cannot make their
loan repayments. 5
5 See OCC Interpretive Letter No. 283, reprinted in [1983-1984
Transfer Binder] Fed. Banking L. Rep. (CCH) f 85,447 (March 16,
1984) (involving sales of credit life, disability, mortgage life, involun¬
tary unemployment, and vendors single interest insurance); 12
C.F.R. Part 2 (regulating sales of credit life insurance); IBAA v.
Heimann, 613 F.2d 1164 (D.C. Cir. 1979), cert denied, 449 U.S. 823
(1980) (confirming the OCC’s authority to adopt its credit life insur¬
ance regulation at 12 C.F.R. Part 2). See also OCC Interpretive
Letter No. 671, reprinted in [1993-1994 Transfer Binder] Fed. Bank¬
ing L. Rep. (CCFI) f 83,619 (July 10, 1995), and OCC Interpretive
Letter No. 724, reprinted in [1995-1996 Transfer Binder] Fed. Bank¬
ing L. Rep. (CCFI) H 81,039 (April 22, 1996) (involving sales of
vehicle service contracts); 12 CFR 7.1013 (1996) (confirming the
ability of national banks to enter into debt cancellation contracts);
The rationale behind these OCC precedents and court
cases also is applicable to the bank's proposal. A debt
suspension product provides a convenient and useful way
for the bank and its borrowers to manage the risk of non¬
payment due to temporary financial hardship. As was dis¬
cussed above, it protects the bank by providing a source
of compensation for the credit risk that is part of the trans¬
action, and it protects the borrower from long-term credit
damage during an interval of financial difficulty.
Conclusion
Based on the foregoing facts and analysis, we conclude
that providing debt suspension products in connection
with a bank's credit card business is permissible for the
bank pursuant to section 24(Seventh) of the National Bank
Act. This conclusion relates only to the permissibility of
debt suspension agreements under the National Bank
Act. The bank should, of course, satisfy itself regarding
the treatment of such agreements under any other appli¬
cable laws and provide appropriate disclosures to fully
inform consumers about the relevant costs and terms,
such as may be required under the Truth in Lending Act
regulations or other applicable regulation or supervisory
guidance. In this regard, I note that the OCC has issued
an advance notice of proposed rulemaking addressing
debt cancellation and suspension products. The bank's
product would be subject to any final regulation adopted
as a result of that rulemaking. 6
Prior to conducting the described activities, the bank
should consult with its examiner-in-charge or with the ap¬
propriate supervisory office to ensure that its program will
comply with reporting and reserving requirements as as¬
sociated with providing debt cancellation products. See
61 Fed. Reg. 4852 (1996).
Jonathan Rushdoony
District Counsel
First National Bank of Eastern Arkansas v. Taylor, 907 F.2d 775
(1990) (same).
6 See Debt Cancellation Contracts, 65 Fed. Reg. 4176 (Jan. 26,
2000 ).
60 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Interpretive Letter No. 904—
J anuary 18, 2001
12 USC 24(7)
Re: Proposal by [ ], to Engage in Finder Activity
Dear [ ]:
This responds to your request for confirmation of the legal
permissibility of a proposal by [ ] (“bank”), to help ar¬
range for the purchase of nonfinancial products by its
credit card customers (“proposal”). The bank proposes to
make each customer who contacts the bank's call center
aware that a nonfinancial product is available to the cus¬
tomer and that the bank will, upon the customer’s request,
transmit certain information to the product's vendor. For
the reasons below, and based on the representations and
information provided, we find that such activities are per¬
mitted by the National Bank Act and are consistent with
precedent of the Office of the Comptroller of the Cur¬
rency. 1
A. Background
The bank is one of the largest issuers of credit cards in
the United States. The bank's credit card customers fre¬
quently telephone the bank in order to obtain information,
request a service, or conduct some other business with
the bank. Under the proposal, the bank will advise these
customers that it can help arrange for the purchase of a
nonfinancial product by the customer. At the end of each
such “in-bound” call, the bank will inform the customer
that a product is available to the customer and that the
customer has an opportunity to receive the product by
informing the customer service representative that he is
interested. The initial nonfinancial product the bank pro¬
poses to help arrange for the purchase of is magazine
subscriptions. If the customer is interested in receiving the
product, the bank will forward the pertinent information
about the customer’s interest to the product's vendor. The
customer will also be advised that the product and any
follow-up after the initial indication of interest will be
handled by the product's vendor.
1 This letter addresses only the legal authority of the bank to
conduct the proposed activities. We will address separately with
the bank the consumer privacy and telemarketing issues implicated
by the proposal. However, we note that, beginning July 1, 2001, the
mandatory date for compliance with the privacy regulations (see 12
CFR part 40), the bank will be prohibited from disclosing its cus¬
tomers’ account numbers to a nonaffiliated vendor so that the ven¬
dor may charge the accounts of bank customers for the vendor’s
products. In accordance with the regulations, the bank may provide
encrypted account numbers to a vendor for use in a marketing
program only if the bank does not enable the vendor to decrypt the
numbers.
The bank's role will not extend beyond the transmission of
information to the vendor regarding a customer’s indi¬
cated interest in the product, except for the bank’s func¬
tion as the payment intermediary for the product when the
customer is charged. 2 The actual products and services
will be provided by unaffiliated vendors, 3 and the bank
would have no responsibility for providing the product or
service. The unaffiliated vendor would compensate the
bank for orders received from the bank’s customers.
B. Discussion
A national bank “may act as a finder in bringing together
a buyer and a seller.” 12 CFR 7.1002(a). The activity of
acting as a finder “includes, without limitation, identifying
potential parties, making inquiries as to interest, introduc¬
ing or arranging meetings of interested parties, and other¬
wise bringing parties together for a transaction that the
parties themselves negotiate and consummate.” 12 CFR
7.1002(b). The finder function is an activity authorized for
national banks under 12 USC 24(Seventh) as part of the
business of banking.
OCC interpretive letters and decisions have permitted na¬
tional banks acting as a finders to bring together buyers
and sellers of a wide variety types of products and ser¬
vices. See, e.g., Corporate Decision 2000-11 (June 24,
2000) (national bank may act as finder to bring program
beneficiaries together with program benefits); Conditional
Approval No. 347 (January 29, 2000) (permitting Web
page hyperlinks for customers to access products and
services considered useful for small businesses); OCC
Interpretive Letter No. 875, reprinted in [1999-2000 Trans¬
fer Binder] Fed. Banking L. Rep. (CCFI) K 81-369 (Octo¬
ber 31, 1999) (permitting a national bank to create a
“virtual mall,” a bank-hosted collection of Web pages with
2 Twelve CFR 226.12(c) states the rights of a cardholder to assert
against a card issuer claims or defenses concerning property or
services purchased with a credit card when a merchant fails to
adequately resolve the dispute. Generally, these rights apply only if
the amount of credit extended to obtain the property or services
that gives rise to the dispute exceeds $50, and the disputed trans¬
action occurred in the cardholder’s home state or within 100 miles
of the cardholder’s home address. 12 CFR 226.12(c)(3)(ii). How¬
ever, these dollar amount and geographic limitations do not apply
when the person honoring the credit card, inter alia, obtained the
order for the disputed transaction through a mail solicitation made
or participated in by the card issuer, i.e., a statement stuffer. Id. at
fn. 26. We recommend that the bank check with the Federal Re¬
serve Board (“Board”) to determine whether the Board would find
the bank’s telephone solicitation to be the equivalent of a statement
stuffer for Regulation Z purposes.
3 The bank will not be engaged in any tying arrangement
whereby a subscription to a magazine would be required for the
customer’s participation in any other banking service offered by the
bank. In addition, the bank represents that it will conduct its due
diligence process for third-party vendors in light of OCC Advisory
Letter 2000-9 (August 29, 2000).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 61
links to third-party vendors' Web sites); OCC Interpretive
Letter No. 653, reprinted in [1994-1995 Transfer Binder]
Fed. Banking L. Rep. (CCH) K 83,601 (December 22,
1994) (national bank may act as finder for insurance prod¬
ucts); No-Objection Letter No. 89-02, reprinted in [1989—
1990 Transfer Binder] Fed. Banking L. Rep. (CCH)
If 83,014 (April 17, 1989) (permitting national bank acting
as finder to distribute automobile club applications and
assist customers in filling out applications).
As part of the finder authority, the OCC has permitted
national banks to provide customers with information
about a vendor’s products and services and their avail¬
ability. See Conditional Approval No. 347, supra ; OCC
Interpretive Letter No. 824, reprinted in [1997-1998 Trans¬
fer Binder] Fed. Banking L. Rep. (CCH) 81-273 (Febru¬
ary 27, 1998) (permitting national bank to distribute
informational materials and refer customers to third-party
vendors); No-Objection Letter No. 89-02, supra. As finder,
national banks may also convey one party's expression of
interest to the other party. See OCC Interpretive Letter No.
478, reprinted in [1989-1990 Transfer Binder] Fed. Bank¬
ing L. Rep. (CCH) If 83,028 (March 2, 1989) (national
bank acting as finder may convey expressions of interest
to potential party); OCC Interpretive Letter No. 437, re¬
printed in [1988-1989 Transfer Binder] Fed. Banking L.
Rep. (CCH) f 85,661 (July 27, 1988) (as finder, national
bank may assist customers in completing applications
and forward completed applications). National banks may
accept a fee for their finder services. 12 CFR 7.1002(c).
The proposal is consistent with a national bank's authority
to act as a finder. Bank credit card customers telephone
the bank to make inquiries or to request services of the
bank. At the end of each call, the bank's customer service
representative will ask whether the customer is interested
in receiving one of a number of magazines. If the cus¬
tomer indicates that he wishes to receive one or more
subscriptions, the customer service representative for¬
wards this expression of interest, along with the pertinent
information collected from the customer, to the third-party
vendor.
Conclusion
Based upon the foregoing facts and analysis, and the
representations made by the bank in connection with its
request, I conclude that the proposed activity is permis¬
sible for a national bank.
If you have any questions, please contact Steven Key,
senior attorney, at (202) 874-5300.
Julie L. Williams
First Senior Deputy Comptroller and Chief Counsel
Interpretive Letter No. 905—
J anuary 29, 2001
12 USC 24(7)
Subject: Stock of [ ]
Dear [ ]:
This is in response to your letter of December 8, 2000,
addressed to Leigh Hoge, assistant deputy comptroller,
Tulsa, Oklahoma. According to your letter, [ ] (“the
bank”) purchased a key person life insurance policy on its
chairman in 1974 and still owns this policy today. Over the
years, the issuer of the policy has gone through a number
of mergers and corporate restructurings. The most recent
change occurred on September 20, 2000, when the insur¬
ance carrier’s holding company converted from mutual to
stock ownership. Due to this “demutualization,” the bank,
as a policyholder, received a number of shares in the
holding company, [ ]. It is my understanding that, under
the terms of the transaction, you did not have the option
to choose to receive cash instead of the shares. The num¬
ber of shares involved is less than 0.01 percent of the
total outstanding shares of the holding company. You re¬
quested confirmation that the bank may retain these
shares of stock, and asked about the appropriate ac¬
counting treatment.
You represented that the bank purchased the life insur¬
ance policy for purposes that the OCC has found to be
incidental to banking under 12 USC 24(Seventh). In fact,
since the issuance of former Banking Circular 249 in
1991, the OCC has specifically listed key person life insur¬
ance as a permissible holding. When a mutual life insur¬
ance underwriter converts to stock form, which has
become relatively common in recent years, shares in the
new company are distributed to the policyholders based
on the amount of insurance that they own. Under these
circumstances, the bank's receipt of the stock is probably
most properly characterized as a byproduct of the per¬
missible activity of purchasing life insurance for the bank's
needs, and not as a “purchase” of stock within the mean¬
ing of 12 USC 24(Seventh). Moreover, the bank's retention
of this stock does not raise any safety and soundness
concerns, according to examining personnel who have
considered it. Should any such concerns arise, the bank
would be expected to divest the shares, upon the direc¬
tion of the OCC, as soon as practicable.
Accordingly, the OCC does not object to retention of the
[ ] stock by the bank. Your supervisory office will contact
the bank separately regarding the accounting question
that you raised. I trust that this has been responsive to
62 Quarterly J ournal, Vol. 20, No. 2, J une 2001
your inquiry. If you have further questions, please contact
me at (202) 874-5300.
Christopher C. Manthey
Senior Attorney
Bank Activities and Structure Division
Interpretive Letter No. 906—
J anuary 19, 2001
State v. Federal Law
James Caras, Counsel
City Council Committee on Finance
75 Park Place
New York, NY 10036-7780
Re: OCC Views as to National Bank Authority to Charge
ATM Fees
Dear Mr. Caras:
Pursuant to your request for comments, I am writing to
bring to the attention of the New York City Council the
views of the Office of the Comptroller of the Currency
(OCC) concerning the applicability to national banks of
state and local laws that purport to restrict national bank
automated teller machine (ATM) fees.
We understand that the City Council is considering a pro¬
posed amendment to the New York administrative code to
prohibit “surcharge” 1 fees on ATM transactions by finan¬
cial institutions generally. Without specifically addressing
the features of the proposed New York legislation, we ap¬
preciate the opportunity to present the OCC's views on
this issue, and our experience thus far in litigation chal¬
lenging state laws and interpretations in Connecticut 2 and
Iowa that attempted to impose restrictions on national
bank ATMs, 3 and municipal ordinances in San Francisco, 4
1 The OCC uses the term “access fees” to denote what some
banks call “convenience fees,” and what opponents call “sur¬
charges.”
2 First Union Nat'l Bank v. Burke, 48 F. Supp. 2d 132 (D. Conn.
1999) (Connecticut enjoined from asserting enforcement jurisdiction
over national bank ATMs) ("Burke”); cf. Burke v. Fleet Nat’l Bank,
742 A.2d 293 (Conn. 1999) (Connecticut state law does not prohibit
access fees).
3 See Bank One, Utah v. Guttau, 190 F.3d 844 (8th Cir. 1999)
(cert, denied sub nom. Foster v. Bank One, Utah, 120 S.Ct. 1718
(2000) (Iowa location, registration, and advertising restrictions on
national bank ATMs preempted) (“Guttau”).
4 Bank of America v. City and County of San Francisco, et at.. No.
00-16994 (9th Cir. filed 7/18/00) (appeal from permanent injunction
Santa Monica, 5 Newark, and Woodbridge, New Jersey
that attempted to prohibit ATM “surcharges.” 6
The OCC has taken the position in these cases, primarily
through the medium of briefs amicus curiae, that: 1) the
National Bank Act and OCC regulations implementing the
act authorize national banks to provide ATM services, to
charge fees for those services, and to set the rates for
those fees; and 2) under well-established supremacy
clause principles, state or local restrictions that obstruct
the exercise of those national bank powers are preempted
by federal law. The OCC has also rebutted the argument
consistently advanced against this position, that the fed¬
eral Electronic Funds Transfer Act rather than the National
Bank Act controls on these issues. None of these state or
local restrictions on national bank ATM operations has
thus far survived legal challenges based on these propo¬
sitions.
The remainder of this letter summarizes the legal and
business developments that gave rise to litigation on this
subject, and the OCC’s position as to the issues pre¬
sented.
Background: ATM Fees Developments
The stimulus for litigation concerning ATM fees has come
from statutory and market changes over the past decade
that induced financial institutions to provide additional ser¬
vices, in a wider range of ATM locations, in return for
additional fees. Until 1996, the nationwide ATM networks
prohibited their member banks from charging access
fees, and as a result most national banks did not do so.
Over time, however, some state legislatures outlawed the
network contractual restrictions, 7 and banks challenged
them on antitrust grounds. Those pressures caused the
nationwide networks to abandon the access fee prohibi¬
tion in April 1996. As a result, the availability of ATMs
increased significantly as access fees enabled banks to
defray costs and sometimes earn a return on ATM deploy¬
ment. The other major change, also in 1996, was an
amendment to the National Bank Act that removed geo-
against ordinance entered 6/30/00 (N.D. Cal. No. C-99^1817-
VRW).
5 Bank of America v. City and County of Santa Monica, et at., No.
00-16355 (9th Cir. filed 7/14/00) (appeal from permanent injunction
against ordinance entered 6/30/00 (N.D. Cal. No. C-99^1817-
VRW).
6 New Jersey Bankers Ass’n v. Township of Woodbridge, No. 00-
702 (JAG), (D.N.J November 8, 2000); New Jersey Bankers Ass'n v.
City of Newark, No. CV-00-702 (JAG), (D.N.J. November 8, 2000)
(consent order and permanent injunction against ordinances pro¬
hibiting ATM “surcharges”).
7 See Valley Bank of Nevada v. Plus System, Inc., 914 F.2d 1186
(9th Cir. 1990) (upholding state law authorization for state banks to
charge fees notwithstanding network prohibitions).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 63
graphical limits on the deployment of national bank
ATMs. 8 Some national banks exercised that freedom to
introduce ATMs into states where restrictions had previ¬
ously discouraged entry.
These changed circumstances led to a variety of legal
conflicts between states and national banks: attempts to
enforce state restrictions that no longer applied to national
bank ATMs, 9 charges that access fees violated existing
state law, 10 and new legislation that directly prohibited
access fees. 11 Those conflicts have given rise to requests
by national banks for OCC interpretations as to the scope
of the national bank power to charge fees.
National Bank Authority to Charge Access Fees
under the National Bank Act
The statutory authority for national banks to conduct busi¬
ness comes from the National Bank Act, tracing to 1863.
In addition to setting forth the framework for the creation,
regulation, and operation of national banks, the National
Bank Act governs the scope of “banking powers”— i.e.,
statutorily authorized banking-related activities. These in¬
clude a list of five enumerated powers— e.g., lending
money and taking deposits, the separate authority to en¬
gage in the “business of banking,” as reasonably inter¬
preted by the OCC, 12 —and the umbrella phrase “all such
incidental powers as shall be necessary to carry on the
business of banking.” 12 USC 24(Seventh). 13 The Su-
8 Under Section 36 of the National Bank Act, national banks may
establish “branches” only to the extent that state law authorizes
state banks to establish branches. See 12 USC 36(c)—(g). When
ATMs were first deployed in the 1970s, court decisions established
that national bank ATMs constituted “branches" under section 36,
and thus were made subject to state-law-based location limits. In¬
dependent Bankers Ass'n of America v. Smith, 534 F.2d 921 (D.C.
Cir. 1976). Accordingly, from the 1970s until 1996, national banks
generally could establish ATM “branches” only to the extent that
states permitted the establishment of full-service brick-and-mortar
branches in the same state. The 1996 amendment reversed that
status, expressly excluding ATMs from the definition of a “branch,”
and thereby removed national bank ATMs from the reach of state-
law-based restrictions. See Economic Growth and Regulatory Pa¬
perwork Reduction Act, Pub. L. No. 104-208, Section 2205(a), 110
Stat. 3009^105 (September 30, 1996); Guttau, 190 F.3d 844 (8th
Cir. 1999); 12 CFR 7.4003. Those branching limits continue to apply
to national banks’ full-service brick-and-mortar branches.
9 See, e.g., Guttau.
10 See, e.g., Burke.
11 San Francisco, Santa Monica, Newark, and Woodbridge.
12 NationsBank of North Carolina, N.A. v. Variable Annuity Life
Ins. Corp., 513 U.S. 251 (1995) ("VALIC")
13 12 USC 24, in relevant part, authorizes national banks: “Sev¬
enth. To exercise ... all such incidental powers as shall be neces¬
sary to carry on the business of banking; by discounting and nego¬
tiating promissory notes, drafts, bills of exchange, and other
evidences of debt; by receiving deposits; by buying and selling
preme Court has made clear that the “business of bank¬
ing” authorization is broad and flexible, and takes on
additional meaning as the business of banking
changes. 14 It is therefore settled that the “business of
banking” evolves to meet the needs of a changing soci¬
ety, innovations in financial transactions, and advances in
technology. 15
The National Bank Act Authorizes National Banks
to Provide Services Through ATMs
The banking services provided through ATMs represent
long-established banking activities: receiving deposits,
disbursing cash from bank accounts, and extending
credit in the form of cash advances. Each of these activi¬
ties lies at the heart of national bank authority under sec¬
tion 24(Seventh), whether as part of the enumerated
national bank power to receive deposits, as part of the
authority to engage in the “business of banking,” or as an
activity incidental to permissible banking activity.
That conclusion is entirely unaffected by the fact that
these traditional services are delivered through ATMs
rather than through teller windows. 16 The power to deploy
and operate ATMs is implicit in the National Bank Act's
authorization of national banks to receive deposits, make
loans, and carry on the “business of banking,” as the
OCC has expressly reaffirmed in a recent regulation. 12
CFR 7.4003; 12 USC 24(Seventh); Guttau , 190 F.3d at
849. ATMs and other electronic media simply represent a
different means of exercising established banking powers.
That authority, as with all other powers vested in national
banks, is not subject to conditions imposed by state law
except where Congress has so specified. 17
exchange, coin, and bullion; by loaning money on personal secu¬
rity; and by obtaining, issuing, and circulating notes. . . .”
14 VALIC, 513 U.S. at 258 n.2 (“We expressly hold that the ’busi¬
ness of banking’ is not limited to the enumerated powers in Section
24 Seventh and that the Comptroller therefore has discretion to
authorize activities beyond those specifically enumerated”).
15 See also M & M Leasing Corp. v. Seattle-First Nat’l Bank, 563
F.2d 1377, 1382 (9th Cir. 1977), cert, denied, 436 U.S. 956 (1978)
(”[W]e draw comfort from the fact that commentators uniformly
have recognized that the National Bank Act did not freeze the
practices of national banks in their nineteenth century forms. . . .
[W]e believe the powers of national banks must be construed so as
to permit the use of new ways of conducting the very old business
of banking”).
16 12 CFR 7.1019 provides, in part: “A national bank may per¬
form, provide, or deliver through electronic means and facilities any
activity, function, product, or service that it is otherwise authorized
to perform, provide, or deliver.”
17 See, e.g., Clarke v. Securities Industry Ass'n, 479 U.S. 388,
406-408 (1987) (no geographic restrictions upon authorized securi¬
ties transactions); NBD Bank v. Bennett, 67 F.3d 629, 632-33 (7th
Cir. 1995) (national banks can transact business irrespective of
their customers’ locations unless federal law says otherwise).
64 Quarterly J ournal, Vol. 20, No. 2, J une 2001
National Banks are Authorized to Charge Fees for
Their Services
Contrary to the suggestions of some opponents of access
fees, financial institutions are private, for-profit enterprises,
and not public utilities. A national bank's authority to pro¬
vide a product or service necessarily carries with it the
authority to charge a fee for the product or service pro¬
vided. 18 National banks are charged with the authority to
engage in the “business of banking," which cannot be
separated from the authority to seek a business return.
Any contrary rule would render national bank powers illu¬
sory.
The Supreme Court has long recognized that national
banks are private enterprises that are entitled to conduct
normal business activities. In holding that the National
Bank Act preempts a state restriction on national bank
advertising, the court stated: “Modern competition for
business finds advertising one of the most usual and use¬
ful of weapons. ... It would require some affirmative indi¬
cation to justify an interpretation that would permit a
national bank to engage in a business but gave no right
to let the public know about it." Franklin Nat'l Banks/. New
York , 347 U.S. 373, 377-78 (1954). 19 As a matter of statu¬
tory interpretation, it would make even less sense to per¬
mit national banks to “engage in a business,” but then to
deny them the ability to charge for providing the service.
National Banks are Authorized to Set the Rates
for Service Fees
Because federal statutes impose neither a prohibition on
charging fees nor a cap on how much a national bank
may charge, national banks are free to set the prices for
their services, subject only to the OCC's supervisory over¬
sight. Even though heavily regulated, national banks are
not required to seek regulatory approval for any change in
their rates. The National Bank Act does not displace busi¬
ness judgments by dictating any general restrictions on
the kinds or amounts of fees that banks may charge for
services, leaving those decisions to the discretion of bank
management. 20 National bank fee rate decisions are
therefore not subject to limitation under either state law or
federal law.
18 By “customers,” the OCC expressly includes any party that
obtains a product or service from the bank, and not just deposit
customers.
19 See also Guttau, 190 F.3d at 850 (Iowa ban on on-terminal
national bank ATM advertising preempted).
20 That statutory freedom to set the rate for fees contrasts with
the specific National Bank Act restriction on national bank interest
rates, which are made subject to specified state usury laws. 12
USC 85.
The OCC's interpretations of the National Bank Act reflect
these principles. The applicable OCC regulation indicates
that the establishment and rate of fees are matters to be
determined by the national bank “in its discretion, accord¬
ing to sound banking judgment and safe and sound
banking principles.” 12 CFR 4.002. 21 Furthermore, be¬
cause those powers are inherent elements of national
banks' authority to conduct the business of banking, no
prior approval from the OCC is required for a national
bank to set or change a fee or service charge. Unlike a
utility or a common carrier, national banks are empowered
to set fees in their sound business judgment, and thus
may adjust them as business conditions dictate, without
the necessity of regulatory approval. Within the bounds of
supervisory considerations—which are monitored solely
by the OCC—national banks may decide what fees to
charge for the services they provide.
The Federal Electronic Funds Transfer Act does
not Immunize the Ordinances Against Preemption
by the National Bank Act
There is no basis for the argument that the federal Elec¬
tronic Funds Transfer Act (EFTA), 15 USC 1693 et seq.,
trumps the National Bank Act or insulates local consumer
protection ordinances against preemption. That argument
ignores the text of the EFTA and instead relies upon an
inflated view of the scope of the EFTA “savings clause"
and of the scope of the EFTA generally. This argument
was raised and rejected by both the Eighth Circuit deci¬
sion in Guttau and by the San Francisco District Court.
First, the EFTA savings clause is not a “grant of authority"
to states. The text instead states that certain state con¬
sumer protection measures will be deemed consistent
with the EFTA, and therefore not preempted by the EFTA
itself. The savings clause does not purport to address the
preemptive effect of any other federal law. The text pro¬
vides:
“This subchapter does not annul, alter, or affect the
laws of any State relating to electronic funds transfers,
except to the extent that those laws are inconsistent
with the provisions of this subchapter, and then only to
the extent of the inconsistency. A state law is not incon¬
sistent with this subchapter if the protection such law
affords any consumer is greater than the protection af¬
forded by this subchapter."
21 The regulation provides that the bank’s authority to charge
fees, like all other banking activities, must be exercised in a manner
consistent with safe and sound banking practices. The regulation
addresses a variety of factors relevant to the OCC’s supervisory
concerns, including whether a fee is anticompetitive, unsafe or un¬
sound, or arrived upon through collusion. If the fee-setting process
in the bank has addressed these factors, there is no supervisory
impediment to the exercise of the bank’s authority to charge fees.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 65
15 USC 1693q (emphasis added). The Eighth Circuit re¬
jected an identical argument in Guttau: “Despite [Iowa's]
claims, this anti-preemption provision is specifically limited
to the provisions of the Federal EFTA, and nothing therein
grants the states any additional authority to regulate na¬
tional banks.” 190 F.3d at 850; see also First Union Nat’l
Banks/. Burke , 48 F.Supp. 2d 132, 146^17 (D.Conn. 1999)
(The text of the EFTA “does not contain language from
which it can be reasonably inferred that Congress in¬
tended to disrupt other federal laws including the National
Bank Act. .. .”) The EFTA savings clause therefore has
absolutely nothing to say about the preemptive effect of
the National Bank Act upon restrictive state or local laws.
Second, and independently, there is no conflict between
the EFTA and the National Bank Act on this issue because
the EFTA simply does not address national banks' sub¬
stantive power to charge fees. Instead, the EFTA primarily
addresses procedural issues such as disclosures. 22 In
much the same manner as the Uniform Commercial
Code, the EFTA also addresses the allocation of liabilities
for electronic transactions as between consumers and fi¬
nancial institutions (Sections 1693g-n). 23 The Federal Re¬
serve Board, the agency charged with interpretation of the
EFTA, has published its interpretations in Regulation E,
which does not even hint that the EFTA addresses the
substantive power to charge fees. 24 Thus, the argument
that the EFTA controls because it is “more specific” than
the National Bank Act fails because the EFTA is specific
only as to issues other than the power to charge fees.
Consistently, when the EFTA was recently amended so as
to address ATM fee transactions, it addressed only the
procedure for charging fees and was silent as to the
power to charge fees. The Gramm-Leach-Bliley Act con¬
tains a section titled the “ATM Fee Reform Act of 1999,”
which requires that ATM operators give consumers notice
22 Eg., disclosures to consumers (15 USC 1693c); documenta¬
tion of transfers (Section 1693d); procedures for preauthorized
transfers (Section 1693e); and procedures for error resolution (Sec¬
tion 1693f).
23 In so doing, the EFTA, like other federal consumer statutes,
roughly parallels the function of the Uniform Commercial Code,
providing a procedural framework for transactions while other
sources of authority—contract or other statutory provisions—
generally provide the substance.
24 The Federal Reserve’s Regulation E interpreting the EFTA no¬
where addresses the substantive authority to charge fees. See 12
CFR part 205. Instead, Regulation E requires at the initiation of an
account the disclosure of fees for electronic transfers or for the right
to make electronic transfers. 12 CFR 205.7(b)(5). Regulation E in¬
cludes a special section on the interaction of the EFTA with “other
law,” which addresses the Truth-In-Lending Act and state law, but
makes no reference to the National Bank Act. 12 CFR 205.12. Ac¬
cordingly, the regulation reflects the Federal Reserve’s presumption
that the EFTA and the National Bank Act have distinct spheres that
do not interact.
of access fees rates at the time of the transaction, but
says nothing about the power of banks to charge those
fees. Gramm-Leach-Bliley Act, Section 701-705, S. 900,
106th Cong., 1st Sess. Section 702 (1999). Thus, in stat¬
ing the way in which banks can charge such fees, Con¬
gress clearly contemplated that such fees could
legitimately be charged. 25 The notice provision simply ex¬
tends other disclosure requirements in the EFTA and
Regulation E, and thus is utterly consistent with the other
procedural provisions of the EFTA. Thus, in purporting to
“reform” ATM fees, Congress made no changes to the
authority of national banks under the National Bank Act to
charge access fees.
There is no merit to the suggestion that the EFTA is the
sole umbrella federal authority over any issue related to
ATMs—in essence, “occupying the field” of federal ATM
regulation. The EFTA cannot be made to fit that mold.
First, the EFTA shares with other federal statutes, besides
the National Bank Act, authority over various aspects of
ATM operation. 26 Furthermore, ATM operations are only a
subset of the electronic funds transfers to which the EFTA
is addressed. 27 More broadly, the EFTA is merely one of
an array of statutes that operate in conjunction with the
National Bank Act without conflict, each statute supreme
in its own sphere. Other transaction-specific statutory re¬
gimes include: consumer protection statutes such as the
as the Truth-in-Lending Act, 15 USC 1601 et seq.: pay¬
ments system regulation such as the Expedited Funds
Availability Act, 12 USC 4001 et seq.: and the omnibus
allocations of rights and liabilities under the Uniform Com¬
mercial Code. Accordingly, the EFTA does not displace
the National Bank Act authority for national banks to
charge fees for ATM use.
25 Indeed, this precise reasoning was recently employed by the
Connecticut Supreme Court in rejecting the Connecticut banking
commissioner’s interpretation of state law to prohibit ATM access
fees. Noting that a Connecticut statute required disclosure to the
depositor of any bank deposit fees, but was silent as to the sub¬
stantive authority to charge fees, the Connecticut Supreme Court
concluded that the disclosure statute “assumes that the authority to
impose fees does exist.” Burke v. Fleet Nat’l Bank, 742 A.2d 293,
304 (Conn. 1999).
26 Aside from the National Bank Act, aspects of ATM operation
are regulated at the federal level by a number of statutes, including
the Expedited Funds Availability Act, 12 USC 4002(e), 4004(d)(2),
and the Flome Owners Loan Act, 12 USC 1461 et seq.
27 In addition to ATM transactions, the scope of the EFTA covers
credit card, debit card, and other electronic transfers. 15 USC
1693a(6).
66 Quarterly J ournal, Vol. 20, No. 2, J une 2001
State or Local Legislation that Would Prohibit
Fees Authorized by the National Bank Act is
Preempted by Operation of the Supremacy Clause
Under the Constitution’s Supremacy Clause, when the
federal government acts within the sphere of its authority,
federal law is paramount over, and preempts, inconsistent
state law. See, e.g., McCulloch v. Maryland , 17 U.S. (4
Wheat) 316 (1819). The nature and degree of inconsis¬
tency required to trigger preemption has been expressed
in a variety of formulations, 28 but has been usefully sum¬
marized as a question whether, under the circumstances
of a particular case, the state law may “stan[d] as an
obstacle to the accomplishment and execution of the full
purposes and objectives of Congress.” Barnett Bank v.
Nelson , 517 U.S. 25, 31 (1996), quoting Hines v.
Davidowitz, 312 U.S. 52, 67 (1941). Federal courts have
repeatedly applied those principles to determine that fed¬
eral law preempts state law that would pose obstacles to
the exercise of national bank powers. 29 The court has
observed that the history of supremacy clause litigation of
28 “This Court, in considering the validity of state laws in the light
of treaties or federal laws touching the same subject, has made use
of the following expressions: conflicting: contrary to; occupying the
field; repugnance; difference; irreconcilability; inconsistency; viola¬
tion; curtailment; and interference.” Hines v. Davidowitz, 312 U.S.
52, 67 (1941); see Bank of America Nat’l Trust & Sav. Ass'n v.
Shirley, 96 F.3d 1108 (8th Cir. 1996) (preemption may be express or
by federal occupation of the field).
29 The Supreme Court established long ago that “the states can
exercise no control over [national banks], nor in any way affect their
operation, except in so far as Congress may see proper to permit.”
Farmers' & Merchants' Nat'l Bank v. Dearing, 91 U.S. 29, 33-35
(1875). See also First Nat'l Bank of Logan v. Walker Bank & Trust
national bank authority is “one of interpreting grants of
both enumerated and incidental 'powers' to national
banks as grants of authority not normally limited by, but
rather ordinarily pre-empting, contrary state law." Barnett
Bank , 517 U.S. at 27. 30
In the case of access fee prohibitions, it is our view that
local laws “pose an obstacle” to the exercise of powers
conferred by federal authority. Where federal law says that
national banks may charge access fees, and local ordi¬
nances say that they may not, the conflict between federal
and local prescriptions is manifest and total. Accordingly,
it is the OCC's position that local ordinances purporting to
prohibit national bank ATM access fees are preempted by
federal law and rendered unenforceable with respect to
national banks.
I hope that these views will be helpful to the Council. For
further information, please contact Jonathan Rushdoony,
[Northeastern] District Counsel, (212) 790-4010, or
Douglas Jordan, Special Counsel, (202) 874-5280.
Julie L. Williams
First Senior Deputy Comptroller and Chief Counsel
Co., 385 U.S. 252, 256 (1966) (observing that “[t]he paramount
power of the Congress over national banks has .. . been settled for
almost a century and a half”). See generally Barnett Bank (federal
statute preempts state statute restricting bank sales of insurance);
Daws v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896).
30 It is immaterial to the application of this principle whether the
federal power is explicit or implicit in the National Bank Act. Barnett
Bank, 517 U.S. at 31; see Franklin Nat’l Bank v. New York, 347 U.S.
at 375-79 and n.7.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 67
Mergers—J anuary 1 to March 31, 2001
Page
Nonaffiliated mergers (mergers consummated involving two or more nonaffiliated operating banks). . 71
Nonaffiliated mergers—thrift (mergers consummated involving nonaffiliated national banks and savings
and loan associations).
84
Affiliated mergers (mergers consummated involving affiliated operating banks).
86
Affiliated mergers—thrift (mergers consummated involving affiliated national banks and savings and loan
associations).
88
Quarterly J ournal, Vol. 20, No. 2, J une 2001 69
Mergers—J anuary 1 to March 31, 2001
Most transactions in this section do not have accompany¬
ing decisions. In those cases, the OCC reviewed the com¬
petitive effects of the proposals by using its standard
procedures for determining whether the transaction has
minimal or no adverse competitive effects. The OCC
found the proposals satisfied its criteria for transactions
that clearly had no or minimal adverse competitive effects.
In addition, the Attorney General either filed no report on
the proposed transaction or found that the proposal would
not have a significantly adverse effect on competition.
Nonaffiliated mergers (mergers consummated involving two or more nonaffiliated operating banks), from
J anuary 1 to March 31, 2001
Title and location (charter number) Total assets
Indiana
Integra Bank National Association, Evansville (012132). 2,536,224,000
and West Kentucky Bank, Madisonville. 293,247,000
merged on January 31, 2001 under the title of Integra Bank National Association, Evansville (012132). 2,834,308,000
Kentucky
Community Trust Bank, National Association, Pikeville (007030). 2,246,362,000
and The Bank of Mt. Vernon, Richmond. 132,020,000
merged on January 26, 2001 under the title of Community Trust Bank, National Association, Pikeville (007030). 2,357,382,000
Minnesota
Wells Fargo Bank Minnesota, National Association, Minneapolis (002006). 50,040,860,000
and The Buffalo National Bank, Buffalo (012959). 127,428,000
merged on January 13, 2001 under the title of Wells Fargo Bank Minnesota, National Association, Minneapolis (002006) ... 50,167,446,000
Missouri
First National Bank of St. Louis, Clayton (012333). 883,529,000
and MidAmerica Bank of St. Clair County, O'Fallon. 30,640,000
merged on March 1, 2001 under the title of First National Bank of St. Louis, Clayton (012333). 909,217,000
Nebraska
Cornerstone Bank, National Association, York (002683). 303,448,000
and The First National Bank of Stromsburg, Stromsburg (008286). 25,898,000
merged on February 22, 2001 under the title of Cornerstone Bank, National Association, York (002683). 326,443,000
New Jersey
Valley National Bank, Passaic (015790). 6,243,176,000
and The Merchants Bank of New York, New York City. 1,370,000,000
merged on January 19, 2001 under the title of Valley National Bank, Passaic (015790). 7,613,176,000
New York
Community Bank, National Association, Canton (008531). 1,928,997,000
and The Citizens National Bank of Malone, Malone (011897). 115,214,000
merged on January 26, 2001 under the title of Community Bank, National Association, Canton (008531) . 2,044,211,000
Ohio
The Farmers' National Bank of Canfield, Canfield (003654). 433,852,000
and The Security Dollar Bank, Niles. 170,712,000
merged on December 31,2000 under the title of The Farmers’ National Bank of Canfield, Canfield (003654). 604,564,000
Peoples Bank, National Association, Marietta (005552). 1,117,275,000
and The Lower Salem Commercial Bank, Lower Salem. 24,787,000
merged on February 23, 2001 under the title of Peoples Bank, National Association, Marietta (005552). 1,141,804,000
Quarterly J ournal, Vol. 20, No. 2, J une 2001 71
Nonaffiliated mergers (continued)
Title and location (charter number) Total assets
Rhode Island
Fleet National Bank, Providence (000200). 160,470,487,000
and Summit Bank, Hackensack. 33,291,598,000
and Summit Bank, Norwalk. 1,350,855,000
and Summit Bank, Bethlehem. 4,388,149,000
merged on March 1, 2001 under the title of Fleet National Bank, Providence (000200). 199,501,089,000
Comptroller's Decision
Introduction
Fleet National Bank, Providence, Rhode Island (Fleet), ap¬
plied to the Office of the Comptroller of the Currency
(OCC) for approval to merge with: Summit Bank,
Hackensack, New Jersey (Summit-NJ); Summit Bank,
Bethlehem, Pennsylvania (Summit-PA); and Summit Bank,
Norwalk, Connecticut (Summit-CT), (collectively Summit
Banks) under Fleet's charter and title under 12 USC
215a-1, 1828(c), and 1831 u (the merger).
Fleet is a national bank that has its main office in Provi¬
dence, Rhode Island, and branches in the states of
Rhode Island, Connecticut, Florida, Massachusetts,
Maine, New Hampshire, New Jersey, and New York.
Summit-NJ and Summit-PA are state banks while
Summit-CT is a state savings bank. The main office and
branches of each Summit Bank are located solely within
that particular bank's chartering state. All parties to this
application are members of the Bank Insurance Fund
(BIF).
As of September 30, 2000, Fleet had approximately $163
billion in assets and $105 billion in deposits. As of the
same date, Summit Bank-NJ had approximately $34 bil¬
lion in assets and $32 billion in deposits; Summit Bank-PA
had approximately $4.5 billion in assets and $3 billion in
deposits; and Summit Bank-CT had approximately $1.3
billion in assets and $1 billion in deposits. All of the Sum¬
mit Banks are wholly owned subsidiaries of Summit
Bancorp, a New Jersey bank holding company.
Fleet has published notice of the application in various
general circulation newspapers including those serving
the head office cities of Fleet and each of the Summit
Banks. All written comments received have been carefully
considered as part of the merger application (see discus¬
sion below). Fleet has also submitted the required notifi¬
cations to the banking supervisors of Connecticut, Rhode
Island, New Jersey, and Pennsylvania.
Statutory and Policy Reviews
A. The merger is authorized under the interstate
merger authority of the Riegle-Neal Act, 12
USC 215a-l, 1831u, and 36(d)
Fleet's home state is Rhode Island and the Summit Banks'
home states are Connecticut, New Jersey, and Pennsylva¬
nia. Therefore, in this merger, national banks with different
home states will merge. Such mergers are authorized un¬
der section 44 of the Federal Deposit Insurance Act:
(1) In General.—Beginning on June 1, 1997, the respon¬
sible agency may approve a merger transaction un¬
der section 18(c) [12 USC 1828(c), the Bank Merger
Act] between insured banks with different home
States, without regard to whether such transaction is
prohibited under the law of any State.
12 USC 18310(a)(1). 1 The Riegle-Neal Act permitted a
state to elect to prohibit such interstate merger transac¬
tions under section 44 by enacting a law between Sep¬
tember 29, 1994, and May 31, 1997, that expressly
prohibits all mergers with all out-of-state banks. See 12
USC 1831u(a)(2) (state “opt-out" laws). In the proposed
1 Section 44 was added by section 102(a) of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, Pub. L.
No. 103-328, 108 Stat. 2338 (enacted September 29, 1994) (the
Riegle-Neal Act). The Riegle-Neal Act also made conforming
amendments to the National Bank Consolidation and Merger Act to
permit national banks to engage in such section 44 interstate
merger transactions and to the McFadden Act to permit national
banks to maintain and operate branches in accordance with sec¬
tion 44. See Riegle-Neal Act 102(b)(4) (adding a new section, codi¬
fied at 12 USC 215a-1) & 102(b)(1)(B) (adding new subsection 12
USC 36(d)). Some interstate mergers may also be authorized under
12 USC 215a. See , e.g., Ghiglieriv. NationsBank of Texas, N.A., No.
3:97-CV-2897-P, 1998 U.S. Dist. LEXIS 6637 (N.D. Texas filed May
6, 1998) (memorandum opinion and order denying preliminary and
permanent injunction); Decision on the Application to Merge
NationsBank of Texas, N.A., Dallas, Texas, into NationsBank, N.A.,
Charlotte, North Carolina (OCC Corporate Decision No. 98-19, April
2, 1998). Since Fleet has branches in Connecticut and New Jersey,
it could have acquired the Summit Banks in those states through a
merger under section 215a; however, the present application was
made under the Riegle-Neal Act.
72 Quarterly J ournal, Vol. 20, No. 2, J une 2001
merger, the home states of the banks are Rhode Island,
Connecticut, New Jersey, and Pennsylvania; none of
these states opted out. Accordingly, this application is
covered by 12 USC 215a-1 & 1831 u(a).
B. Fleet's application meets the requirements of
the Riegle-Neal Act
An application to engage in an interstate merger transac¬
tion under 12 USC 1831 u is also subject to certain re¬
quirements set forth in sections 1831 u(a)(5) and 1831 u(b).
These conditions are: (1) compliance with state-imposed
age limits, to the extent that the Riegle-Neal Act autho¬
rizes such limits; (2) compliance with certain state filing
requirements, to the extent the filing requirements are per¬
mitted in the act; (3) compliance with nationwide and
state concentration limits; (4) community reinvestment
compliance; and (5) adequacy of capital and manage¬
ment skills. This application satisfies all these require¬
ments to the extent applicable.
1. The application satisfies the Riegle-Neal
Act's age requirement
The application satisfies the state-imposed age require¬
ments permitted by section 1831 u(a)(5). Under that sec¬
tion, the OCC may not approve a merger under section
1831 u(a)(1) “that would have the effect of permitting an
out-of-state bank or out-of-state bank holding company to
acquire a bank in a host state that has not been in exist¬
ence for the minimum period of time, if any, specified in
the statutory law of the host State.” 12 USC
1831 u(a)(5)(A). But the maximum age requirement permit¬
ted is five years. 12 USC 1831 u(a)(5)(B). For purposes of
complying with state-imposed age requirements, the host
states for this application are Connecticut, New Jersey,
and Pennsylvania. Neither the New Jersey nor the Penn¬
sylvania interstate bank merger statutes impose a mini¬
mum age requirement on the acquisition of a bank by an
out-of-state national bank. Connecticut law requires that
the target bank be in existence and continuously operat¬
ing for at least five years. 2 Summit-CT has been in exist¬
ence in excess of five years, thereby satisfying the age
For purposes of section 1831u, the following definitions apply:
The term “home State” means, with respect to a national bank, “the
state in which the main office of the bank is located.” The term
“host State” means, “with respect to a bank, a state, other than the
home state of the bank, in which the bank maintains, or seeks to
establish and maintain, a branch.” The term “interstate merger
transaction" means any merger transaction approved pursuant to
section 1831 u(a)(1). The term “out-of-State bank” means, “with re¬
spect to any state, a bank whose home state is another state.” The
term “responsible agency” means the agency determined in accor¬
dance with 12 USC 1828(c)(2) (namely, the OCC if the acquiring,
assuming, or resulting bank is a national bank). See 12 USC
1831 u(f)(4), (5), (6), (8) & (10).
2 Conn. Gen. Stat. 36a-412 (1999).
requirements in that state. Thus, the application satisfies
the Riegle-Neal Act requirement of compliance with state
age laws.
2. The application satisfies the Riegle-Neal
Act's other requirements
The proposed merger meets the applicable filing require¬
ments. A bank applying for an interstate merger transac¬
tion under section 1831 u(a) must (1) “comply with the
filing requirements of any host State of the bank which will
result from such transaction” as long as the filing require¬
ment does not discriminate against out-of-state banks and
is similar in effect to filing requirements imposed by the
host state on out-of-state nonbanking corporations doing
business in the host state, and (2) submit a copy of the
application to the state bank supervisor of the host state.
12 USC 1831 u(b)(1 ). 3 Of the three states in which the
Summit Banks are located—Pennsylvania, New Jersey,
and Connecticut—the only state that will become a host
state of Fleet as a result of this merger is Pennsylvania
since Fleet already has branches in the other two states.
The Pennsylvania interstate bank merger statute does not
contain a provision making the “qualify to do business”
filing requirement imposed on nonbanking corporations
applicable to out-of-state banks with branches in Pennsyl¬
vania. 4 Thus, the proposed merger satisfies the Riegle-
Neal Act requirement of compliance with state filing
requirements.
In addition, a bank applying for an interstate merger
transaction must submit an application to the state bank
supervisor of the host state. 12 USC 1831 u(b)(1). This
3 Under this provision, states are permitted to impose a filing
requirement on out-of-state banks that will operate branches in the
state as a result of an interstate merger transaction under the
Riegle-Neal Act, but the states may impose only those require¬
ments that are within the terms specified. Since Congress has spe¬
cifically set forth and limited what state filing requirements apply for
these interstate transactions, it clearly intended that only those re¬
quirements would apply, and the states may not impose others.
Thus, in a transaction involving only national banks, only the filing
requirements allowed under section 1831 u(b)(1) must be complied
with. For a fuller discussion of this subject, see, e.g., Decision on
the Applications to Merge First Interstate Banks into Wells Fargo
Bank, N.A. (OCC Corporate Decision No. 96-29, June 1, 1996) (at
pages 4-5, 12-14 and note 11).
4 The Pennsylvania statute requires only that where a proposed
merger or consolidation will result in a national bank or an interstate
bank, that the banking department be notified of the merger, and
that, upon request of the banking department, they be provided
evidence of the adoption of the plan of merger. See Pa. Stat. Ann.
tit. 7, § 1603(g) (1995 & Supp. 1997). The Connecticut interstate
bank merger statute does contain a provision making the “qualify to
do business” filing requirement imposed on nonbanking corpora¬
tions applicable to out-of-state banks with branches in Connecticut.
Fleet has complied with this requirement as part of applications it
has submitted to the Connecticut Department of Banking. See
Quarterly J ournal, Vol. 20, No. 2, J une 2001 73
requirement is satisfied in this case; in fact, Fleet has
represented that it has submitted the required notifications
to the state banking supervisors in all of the states in¬
volved in this transaction: Pennsylvania, New Jersey, and
Connecticut. Thus, the proposed merger satisfies this fil¬
ing requirement of the Riegle-Neal Act. 5
3. The proposed merger does not raise issues
with respect to the deposit concentration limits
of the Riegle-Neal Act
Section 1831u(b)(2) places certain nationwide and state¬
wide deposit concentration limits on section 1831u(a) in¬
terstate merger transactions. Under section
1831u(b)(2)(A), the OCC may not approve an interstate
merger transaction if the resulting bank (including all affili¬
ated insured depository institutions) would control more
than 10 percent of the total amount of deposits in the
United States. Under section 1831u(b)(2)(B), the OCC
may not approve an interstate merger transaction (1) if
any bank involved in the transaction (including all affili¬
ated insured depository institutions) has a branch in any
state in which any other bank involved in the transaction
has a branch and (2) if the resulting bank (including all
affiliated insured depository institutions) would control 30
percent or more of the total deposits in any such state.
After the merger, Fleet will control approximately 3 percent
of total deposits in the United States. 6 In addition, after the
merger and all divestitures, Fleet will control less than 30
percent of the deposits in each of the states of Connecti¬
cut, New Jersey, and Pennsylvania. Therefore, the appli¬
cation meets the Riegle-Neal Act's deposit concentration
limits.
4. The proposed merger also does not raise
issues with respect to the special community
reinvestment compliance provisions of the
Riegle-Neal Act
The proposed merger also does not raise issues with re¬
spect to the special community reinvestment compliance
provisions of the Riegle-Neal Act. In determining whether
Conn. Gen. Stat. §§ 36a-412, 33-920 (2000). The New Jersey in¬
terstate bank merger and branching statutes do not appear to con¬
tain a “qualify to do business” filing requirement applicable to out-
of-state national banks acquiring banks with branches in the state.
See N.J. Stat. Ann. §§ 17:9A-133.1, 17:9A-148 (West 1984 &
Supp. 2000).
5 Rhode Island is currently a home state for Fleet and will con¬
tinue as such after the merger, and so does not become one as a
result of the merger. Therefore, the filing requirements of section
1831 u(b)(1) do not apply with respect to it. See Decision on the
Application to Merge First Interstate Bank of Washington, N.A., into
Wells Fargo Bank, N.A. (OCC Corporate Decision No. 96-30, June
6, 1996) (page 8, note 9).
6 Based on June 30, 1999 data.
to approve an application for an interstate merger trans¬
action under section 1831u(a), the OCC must (1) comply
with its responsibilities under section 804 of the federal
Community Reinvestment Act (CRA), 12 USC 2903, (2)
take into account the CRA evaluations of any bank which
would be an affiliate of the resulting bank, and (3) take
into account the applicant bank's record of compliance
with applicable state community reinvestment laws. 12
USC 1831u(b)(3). The OCC's analysis regarding the first
two provisions is discussed in section lll(B) of this deci¬
sion, captioned “The Community Reinvestment Act.” 7 As
for the third provision, the OCC contacted the relevant
state banking department staff and considered Fleet’s
compliance with applicable state community reinvestment
laws. The OCC’s inquiry did not reveal any information
that would be inconsistent with approval of the applica¬
tion.
5. The proposed merger satisfies the adequacy
of capital and management skills requirements
in the Riegle-Neal Act
The OCC may approve an application for an interstate
merger transaction under section 1831u(a) only if each
bank involved in the transaction is adequately capitalized
as of the date the application is filed and the resulting
bank will continue to be adequately capitalized and ad¬
equately managed upon consummation of the transaction.
12 USC 1831u(b)(4). As of the date the application was
filed, Fleet and the Summit Banks satisfied all regulatory
and supervisory requirements relating to adequate capi¬
talization. Currently, each bank is at least satisfactorily
managed. The OCC has also determined that, following
the merger, Fleet will continue to be at least adequately
capitalized and adequately managed. The requirements
of 12 USC 1831u(b)(4) are therefore satisfied.
C. Following the merger application, Fleet may
retain its existing main office and branches
under 12 USC 36(d) and 1831u(d)(l)
Fleet also requested that, upon the completion of the
merger, Fleet (as the resulting bank in the merger) be
permitted (1) to retain and operate, as its main office, its
current main office in Providence, Rhode Island, under 12
USC 1831 u(d)(1), and (2) to retain and operate, as
branches, its other branches and Summit Banks' main
offices and branches, under 12 USC 36(d) and
1831 u(d)(1).
7 With respect to the second provision, the banks that would be
affiliated as a result of the merger and that receive CRA evaluations
are Fleet and Fleet Bank (Rhode Island), N.A., Providence, Rhode
Island. As discussed more fully in section lll(B), the OCC has taken
the CRA evaluations of these banks into consideration and has
discovered no information indicating that the merger should not be
approved.
74 Quarterly J ournal, Vol. 20, No. 2, J une 2001
In interstate merger transactions under section 1831 u, the
resulting bank's retention and continued operation of the
offices of the merging banks is expressly provided for:
(1) Continued Operations.—A resulting bank may, sub¬
ject to the approval of the appropriate Federal banking
agency, retain and operate, as a main office or a
branch, any office that any bank involved in an inter¬
state merger transaction was operating as a main of¬
fice or a branch immediately before the merger
transaction.
12 USC 1831 u(d)(1) (emphasis added). The resulting
bank is the “bank that has resulted from an interstate
merger transaction under this section [section 1831 u(a)].”
12 USC 1831 u(f)(11). 8
Thus, in the present application, Fleet (as the resulting
bank after the merger) may retain and operate as its main
office “any office that [Fleet] was operating as a main
office or branch immediately before the merger transac¬
tion.” The Providence office is currently operating as the
main office of Fleet, and so the resulting bank may retain
and operate it as its main office, provided the merger is
approved under section 1831 u.
Similarly, Fleet (as the resulting bank after the merger)
may retain and operate as branches “any office that [ei¬
ther Fleet or the Summit Banks] was operating as a main
office or branch immediately before the merger transac¬
tion.” Fleet's main office and other branches, and the
Summit Banks’ main offices and branches, are all operat¬
ing as main offices or branches, and so the resulting bank
8 In addition, Congress also added a conforming amendment to
the McFadden Act to emphasize that branch retention in an inter¬
state merger transaction under section 1831u occurs under the
authority of section 1831 u(d):
(d) Branches Resulting From Interstate Merger Transac¬
tions.—A national bank resulting from an interstate merger trans¬
action (as defined in section 44(f)(6) of the Federal Deposit Insur¬
ance Act) may maintain and operate a branch in a State other
than the home State (as defined in subsection (g)(3)(B)) of such
bank in accordance with section 44 of the Federal Deposit Insur¬
ance Act.
12 USC 36(d) (as added by Riegle-Neal Act 102(b)(1)(B)). By its
action in adding section 36(d), Congress made it clear that section
1831 u(d)(1) is an express and complete grant of office-retention
authority for interstate merger transactions effected under section
1831 u and that it operates independently of the provisions for
branch retention in 12 USC 36(b)(2) that apply to mergers under 12
USC 215a. Neither section 36(d) nor section 1831 u(d)(1) refer to
section 36(b)(2). By expressly providing for office-retention in sec¬
tion 1831 u(d)(1) and then incorporating that into the McFadden Act
in section 36(d), Congress clearly intended that those provisions,
rather than the complex branch retention provisions of section
36(b)(2), apply to branch retention in interstate merger transactions
under section 1831u.
may retain and operate them as branches, provided the
merger is approved under section 1831 u.
Therefore, the merger is authorized, and Fleet may retain
the proposed main office and the four banks' other offices
as branches, 9 provided the application meets the require¬
ments for an interstate merger transaction under section
1831 u.
Additional Statutory and Policy Reviews
A. The Bank Merger Act
The Bank Merger Act, 12 USC 1828(c), requires the
OCC’s approval for a merger between insured banks
where the resulting institution will be a national bank. Un¬
der the act, the OCC generally may not approve a merger
which would substantially lessen competition. In addition,
the act also requires the OCC to take into consideration
the financial and managerial resources and future pros¬
pects of the existing and proposed institutions, and the
convenience and needs of the community to be served.
For the reasons stated below, we find this merger may be
approved under section 1828(c).
1. Competitive Analysis
The OCC reviewed the impact of the proposed transac¬
tion on competition for the cluster of products and ser¬
vices offered by depository institutions in the areas
surrounding the Summit banks Fleet is acquiring. The
OCC also considered public comments that raised com¬
petitive issues. There are five relevant geographic markets
for this proposal where competition between Fleet and
Summit Banks is direct and immediate: Waterbury Area,
CT; Fairfield Area, CT; Metro New York/New Jersey; Phila¬
delphia, PA; and, Atlantic City, NJ.
9 In addition, Fleet will succeed to the fiduciary appointments of
the Summit Banks as a result of the merger, and it is authorized to
engage in all activities permissible for national banks, including
fiduciary activities, at its main office and branches in all the states
in which it operates. See, e.g., 12 USC 215a-1 (Riegle-Neal merg¬
ers with a resulting national bank occur under the National Bank
Consolidation and Merger Act) and 215a(e) (the resulting national
bank in a merger succeeds to all the rights, franchises and inter¬
ests, including fiduciary appointments, of the merging banks); De¬
cision on the Application to Merge Bank of America N.T. & S. A.
and NationsBank, N.A. (OCC CRA Decision No. 94, May 20, 1999)
(at page 6 n. 4). See also Decision on the Applications of Bank One
Wisconsin Trust Company, N.A., and Bank One Trust Company,
N.A. (OCC Corporate Decision No. 97-33, June 1, 1997) (national
banks may engage in fiduciary business at trust offices and
branches in different states). Cl. 12 USC 36(f) (general provisions
for host state laws applicable to branches in the host state of out-
of-state national banks).
Quarterly J ournal, Vol. 20, No. 2, J une 2001 75
We applied standard procedures for determining whether
the competitive effects of the merger in the above markets
clearly had minimal or no adverse competitive effects and
found that to be true with the exception of the Atlantic City
market.
The Atlantic City market is defined as consisting of the
New Jersey counties of Atlantic and Cape May. Within this
market, 18 banks and thrifts compete for $4.2 billion in
deposits. Fleet, with 16 branches, ranks fourth with a 10.0
percent market share. Summit-NJ, with 24 branches,
ranks first with a 27.7 percent share. The merger would
increase Fleet's dominance of the market, increasing its
share to 37.7 percent among the remaining 17 competi¬
tors.
In light of this potentially adverse impact, on January 25,
2001, Fleet entered into a formal divestiture plan with the
Department of Justice (DOJ). 10 Fleet will sell five specified
branches in Atlantic County, along with related deposits
and consumer and commercial loans, to competitively
suitable financial institutions as determined by the DOJ
and the Federal Reserve Board of Governors. To further
preserve the existing level of competition, the plan also
requires Fleet to suspend for 180 days any existing non¬
compete agreements and not enter into any new such
agreements with current Fleet or Summit-NJ loan officers
and branch managers in the Atlantic City market. In addi¬
tion, Fleet will be required to widely publicize the sale or
lease of any branches in the Atlantic City market closed
as a result of the merger and optimize the potential for
those sites to be acquired by commercial banks.
In reviewing a merger application by the parent holding
companies of Fleet and Summit Banks, the Federal Re¬
serve Board also considered the competitive impact of
the underlying bank merger. Subject to Fleet's divestiture
commitment, the Federal Reserve Board concluded that
the proposal would not produce a significant effect on
competition or concentration of banking resources in any
relevant geographic market. (See Federal Reserve Board
Order of February 12, 2001.)
Accordingly, while the proposed merger would eliminate a
direct competitor from the Atlantic City market, the formal
divestiture plan and the continuing presence of other
banking alternatives would mitigate any adverse effects.
Therefore, consummation will not have a significantly ad¬
verse impact on competition within the Atlantic City or any
other relevant banking market.
10 See letter by J. Robert Kramer, chief, Litigation II Section, An¬
titrust Division, DOJ, to John D. Hawke Jr., Comptroller of the Cur¬
rency (January 25, 2001).
2. Financial and Managerial Resources
The financial and managerial resources of Fleet and Sum¬
mit Banks are presently satisfactory. The future prospects
of the institutions, individually and combined, are favor¬
able. We find the financial and managerial resources fac¬
tor is consistent with approval of the merger.
3. Convenience and Needs
The merger will not have an adverse impact on the con¬
venience and needs of the communities to be served.
Fleet will continue to serve the same areas that it now
serves. There will not be a reduction of products or ser¬
vices as a result of the merger. The resulting bank is ex¬
pected to meet the convenience and needs of the
community to be served. While Fleet anticipates that
some overlapping branches of the resulting institution will
be closed as a result of the transaction, current Fleet and
Summit Banks customers, as customers of the resulting
bank, will have a greater number of branches at which to
bank.
Fleet represents that as soon as practicable after the
merger, it will offer many of its products and services to
Summit Banks’ customers. The Summit Banks' customers
will benefit from an enhanced array of products and ser¬
vices at the resulting bank, e.g., insurance products and
broker-dealer services, higher lending limits, Internet-
based products and services, and international opera¬
tions as well as the investment banking services of its
affiliates. Accordingly, we believe the impact of the
merger on the convenience and needs of the communi¬
ties to be served is consistent with approval of the appli¬
cation.
The OCC received comments from two community orga¬
nizations during the public comment period. The OCC
investigated the concerns raised in these letters. In addi¬
tion, the OCC considered the comments that had been
received by the Federal Reserve Bank of Boston in con¬
nection with the holding company application to merge
FleetBoston Financial Corporation (FleetBoston) and Sum¬
mit Bancorp. The concerns expressed in the letters and
the results of the OCC's investigation into those concerns
are discussed below. In light of the commenters’ con¬
cerns, the OCC directed examiners with extensive con¬
sumer compliance experience to investigate these
concerns. The scope of this review included an investiga¬
tion of the specific convenience and needs and Commu¬
nity Reinvestment Act (CRA)-related allegations raised by
the commenters. In order to investigate those concerns,
on January 2, 2001, the OCC removed the application
76 Quarterly J ournal, Vol. 20, No. 2, J une 2001
from expedited review processing. 11 In summary, our in¬
vestigation and analysis of the issues identified no basis
for denying or conditioning the approval of this applica¬
tion. 12
a. Community Commitments
Both of the comments received by the OCC expressed
concerns with FleetBoston’s progress in meeting the
terms of its five-year, $14.6 billion Community Investment
Commitment that was announced in 1999 in connection
with the merger of Fleet Financial Group, Inc., and
BankBoston Corporation. The OCC does not enforce such
bank community development or CRA-related commit¬
ments or agreements between private parties, 13 however,
FleetBoston responded to these concerns by explaining
that the results for the first six months of the commitment's
term do not mean that the goals will not be achieved
within five years. FleetBoston noted that loan production
levels and loan demand can vary during different time
periods and are not always constant.
FleetBoston also described the 20-member community
oversight committee it has established, comprised of
community representatives, that meets regularly with bank
management to discuss opportunities to advance
FleetBoston’s community development efforts and to
monitor the implementation of the commitment. The com¬
mitment includes targets for affordable housing lending,
community development lending and investments, con¬
sumer lending targeted to low- and moderate-income
(LMI) areas, and funding for technical assistance and
support for community development organizations.
In connection with the merger, FleetBoston also has de¬
scribed how it has entered into a four-year, $1.22 billion
community development agreement covering New Jersey
(New Jersey agreement). FleetBoston has also an-
11 The commenters requested the OCC to extend the public
comment period and conduct public hearings. After careful consid¬
eration of the circumstances and the standards contained in 12
CFR 5.10(b)(2) and 12 CFR 5.11 (b), on January 21,2001, the OCC
denied these requests.
12 The OCC is aware that a lawsuit was recently filed against
Fleet Mortgage Corporation, a subsidiary of Fleet, by the state of
Minnesota attorney general regarding Fleet Mortgage Corporation’s
alleged sharing of mortgage account information with telemarket¬
ers. While the filing of this lawsuit is not adequate grounds to delay
rendering a decision, the OCC is committed to ensuring that na¬
tional banks protect the financial privacy of consumers. On June 1,
2000, the OCC, the Federal Reserve Board, and the Office of Thrift
Supervision issued a joint final rule entitled “Privacy of Consumer
Financial Information." 65 Fed. Reg. 35,162. Compliance with this
rule is mandatory as of July 1, 2001.
13 See 65 Fed. Reg. 25,088, 25,107 (2000) (Question and Answer
No. 2, § .29(b)) (federal banking agencies do not monitor or en¬
force CRA agreements that banks enter with private organizations).
nounced a four-year, $0.75 billion community investment
commitment covering its activities in Pennsylvania. The
New Jersey and Pennsylvania initiatives include goals for
affordable housing mortgage lending, community devel¬
opment financing and investments, small business lend¬
ing and community development grants. These two
initiatives are in addition to FleetBoston’s $14.6 billion
Community Investment Commitment.
b. Branch Closings
One of the commenters expressed concerns that Fleet
had not disclosed which branches would be closed in
connection with the merger. FleetBoston responded that it
has not yet determined which branches will be closed,
but that because Fleet and Summit Banks have overlap¬
ping branches in 97 communities (primarily in New Jer¬
sey), as many as 85 branches could be closed. As part of
the New Jersey agreement, FleetBoston pledged that no
branches would be closed in LMI areas for a period of
four years in 13 identified towns. In four additional towns,
FleetBoston pledged not to close branches for four years
where the next closest branch is more than 0.5 miles
away from the nearest Fleet branch. FleetBoston does not
expect to close any branches in Pennsylvania as a result
of the merger. For the remaining areas, FleetBoston has
not yet conducted in-depth reviews of the available data
concerning each of the branches located in the commu¬
nities where there is overlap. After such reviews and in the
event FleetBoston determines it is necessary to close a
branch, FleetBoston represented that it will also make an
effort to mitigate any negative impact upon the customers
served by the consolidating branches. 14
In addition, FleetBoston provided the OCC with informa¬
tion indicating that it has a comprehensive branch closing
policy and procedure (branch policy). This branch policy
includes a community impact review and business analy¬
sis, as well as providing for notifications required by law. 15
FleetBoston reported that as of October 1, 2000, 21 per¬
cent of Fleet's 1,272 branches were located in LMI areas
as compared to 20.3 percent at the beginning of 2000.
c. Fees
One of the commenters expressed concerns that the
merger would result in increased fees. Concerns were
14 When appropriate, Fleet may upgrade the consolidated facility,
add staff, and/or leave behind a remote ATM.
15 Federal law requires banks to give notice of proposed branch
closings. The Federal Deposit Insurance Act requires insured de¬
pository institutions to provide notice to the appropriate federal
regulatory agency at least 30 days prior to such closing. 12 USC
§ 1831 r—1. Additionally, the OCC considers a bank’s record of
branch closings, including those closed in LMI areas, in conducting
examinations under the Community Reinvestment Act.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 77
raised that Fleet would not continue to offer Summit
Banks' “Regular Checking” product, which provides free
checking and other benefits to customers who maintain a
minimum daily balance of $99. FleetBoston has repre¬
sented that it will retain the “Regular Checking” product
for all customers who hold such accounts prior to con¬
summation of the merger. After consummation of the
merger, new customers will be offered a low-cost con¬
sumer checking account with a $1 minimum opening bal¬
ance and a $3 maximum monthly service charge for up to
eight checks and four Fleet ATM withdrawals. FleetBoston
also responded that in each of the markets in which Fleet
and Summit Banks currently have overlapping branch net¬
works, Fleet will face aggressive competition from other
financial institutions.
d. Systems Conversion
The commissioner of banks for the Commonwealth of
Massachusetts expressed concerns to the Federal Re¬
serve Bank of Boston regarding the high volume of com¬
plaints his office received, especially after Fleet Financial
Group, Inc.’s merger with BankBoston Corporation in
1999. FleetBoston acknowledged an increase in customer
problems associated with that large and complex merger,
but indicated the volume had peaked in June 2000. Since
the merger will be smaller and less complex than the
BankBoston Corporation merger, FleetBoston has repre¬
sented that it expects to be able to successfully complete
the merger with no appreciable unfavorable impact on its
new or existing customers. OCC examiners have re¬
viewed the complaint history and will continue to monitor
the situation.
e. Subprime Lending
One of the commenters expressed concerns that Fleet
had reentered the subprime lending business. OCC ex¬
aminers confirmed that Fleet is no longer engaged in
subprime lending. FleetBoston also represented to the
Federal Reserve Board in connection with the holding
company merger that none of its lending activities fall
within the coverage of the Home Ownership and Equity
Protection Act, which regulates certain high-cost mort¬
gage loans. Pub. L. No. 103-325, sections 151-158, 108
Stat. 2190 (1994) (codified at 15 USC 1602 (f), (u), (aa),
1604(a), 1610(a)(2), (b), 1604(a), (e), 1639, 1640 (a), (e),
1641 (d)).
f. Conclusion Regarding Convenience and
Needs
Based on the foregoing information, the OCC found that
the impact of the transaction on the convenience and
needs of the communities to be served is consistent with
approval of the merger.
B. The Community Reinvestment Act
The Community Reinvestment Act (CRA) requires the
OCC to take into account each applicant bank's record of
helping to meet the credit needs of the community, includ¬
ing LMI neighborhoods, when evaluating certain applica¬
tions, including mergers. 12 USC 2903; 12 CFR 25.29.
The OCC considers the CRA performance evaluation of
each institution involved in the transaction. Under the CRA
regulations, effective July 1, 1997, the OCC evaluates the
performance of most large banks using lending, invest¬
ment, and service criteria. In these evaluations, the OCC
considers the institution’s capacity and constraints, in¬
cluding the size and financial condition of the bank and its
subsidiaries.
A review of the record of this application and other infor¬
mation available to the OCC as a result of its regulatory
responsibilities revealed no evidence that the applicants'
record of helping to meet the credit needs of its commu¬
nities, including LMI neighborhoods, is less than satisfac¬
tory. Fleet, charter number 1338, received a “satisfactory”
CRA rating dated February 23, 1998. BankBoston, charter
number 200, received an “outstanding” CRA rating dated
March 15, 1999. When Fleet and BankBoston merged into
number 200, the surviving bank was named Fleet. 16
Summit Banks have received the following ratings in their
most recent CRA examinations: Summit-PA received an
“outstanding” CRA rating from the Federal Reserve Bank
of Philadelphia dated March 6, 2000; Summit-NJ received
an “outstanding” CRA rating from the Federal Reserve
Bank of New York dated October 4, 1999; and Summit-CT
received an “outstanding” CRA rating from the Federal
Deposit Insurance Corporation dated August 2, 1999.
In considering Fleet's and Summit Banks' CRA record of
performance, the OCC took into account the wide variety
of affordable home loan programs these entities offer. For
instance, Fleet offers the Affordable Advantage program,
which features a low down payment, no points or private
mortgage insurance, more flexible debt-to-income ratios,
and below market interest rates. Fleet also participates in
a number of other programs targeted to the needs of
16 It should be noted that since Fleet’s last CFtA examination was
conducted, the following banks also merged into Fleet: Fleet Bank,
N.A., Jersey City, New Jersey (with a “satisfactory” CFiA rating
dated February 17, 1998): Bank of Boston—Florida, N.A., Boca
Raton, Florida (with an “outstanding” CRA rating dated July 8,
1999); Fleet Bank—NH, Manchester, New Flampshire (with a “satis¬
factory” CRA rating dated April 13, 1998); Fleet Bank of Maine,
Portland, Maine (with a “satisfactory” CRA rating dated April 13,
1998); and Fleet Bank, F.S.B., Boca Raton, Florida (with a “satisfac¬
tory” CRA rating dated April 27, 1998). In addition, Fleet Bank
(Rhode Island), N.A., Providence, Rhode Island, a subsidiary of
Fleet, received a “satisfactory” CRA rating dated March 6, 2000.
78 Quarterly J ournal, Vol. 20, No. 2, J une 2001
various communities within its assessment area. Summit
Banks have made affordable mortgages available through
several programs, including their Summit Partners In Pride
Affordable Mortgage Product, state housing agency pro¬
grams and Freddie Mac and Fannie Mae programs.
As mentioned previously, the OCC and the Federal Re¬
serve Bank of Boston received comments expressing
CRA-related concerns with Fleet and Summit Banks. 17 As
detailed below, the OCC's investigation of these concerns
disclosed no evidence inconsistent with approval of the
merger.
1. Comments Regarding Fleet National Bank
and Fleet Mortgage Corporation
One of the commenters expressed concerns that Fleet
and Fleet Mortgage Corporation, a subsidiary of Fleet,
rejected applications for conventional home purchase
mortgages from minority applicants more frequently than
from white applicants. Additionally, this commenter stated
that in some instances, Fleet rejected applications for re¬
finance loans from minority applicants more frequently
than from white applicants. The commenter cited Home
Mortgage Disclosure Act (HMDA) data for numerous Met¬
ropolitan Statistical Areas (MSAs) within and outside of
Fleet's assessment areas. 18
FleetBoston responded to the OCC and the commenter
noting that the commenter’s analysis used only data for
conventional mortgages and that when all HMDA home
purchase loans for the relevant FleetBoston entities are
included, denial rates to minorities in most of the MSAs
were generally comparable to or better than the industry
denial rates for those products in those MSAs. In the in¬
stances where the denial rates were higher, FleetBoston
noted its origination rate to minorities was comparable to
or more favorable than the industry average. In four of the
MSAs, FleetBoston observed that the number of applica¬
tions from minorities was too small to draw conclusions.
With respect to refinance loans in the New York City and
Long Island, New York, MSAs, FleetBoston indicated that
while denial ratios were higher than the industry ratios, its
17 One comment to the Federal Reserve Bank of Boston ex¬
pressed concerns that Fleet would not maintain Summit Banks'
membership with the Federal Flome Loan Bank of Pittsburgh, and
would therefore not have access to its Affordable Flousing Program.
FleetBoston represented that it was unable to maintain Summit
Banks’ membership, because FleetBoston is already a member of
the Federal Flome Loan Bank of Boston (FFHLBB). Flowever,
FleetBoston represented it would work with FFILBB to address this
issue.
18 The MSAs the commenter identified are: Bergen, NJ; Birming¬
ham, AL; Bridgeport, CT; Buffalo, NY; Detroit, Ml; Flouston, TX; Kan¬
sas City, MO; Long Island, NY; Memphis, TN; New York, NY; Phila¬
delphia, PA; St. Louis, MO; Trenton, NJ; and Washington, DC.
origination rate for minority borrowers was comparable to
or more favorable than the industry rate.
One comment to the Federal Reserve Bank of Boston
expressed concerns with FleetBoston’s HMDA lending
performance in the Rochester MSA, including the declin¬
ing market share of lending from 1995 to 1999, the declin¬
ing percentage of loans to LMI borrowers and census
tracts, the high percentage of refinance loans in 1998 and
1999, the denial rates for minorities, and the number of
applications received from minorities. Additionally, the
commenter raised issues concerning FleetBoston’s small
business lending performance in Monroe County, New
York.
FleetBoston’s response acknowledged that its market
share of HMDA loans has declined since 1995. It pointed
out, however, that its level of loan production has re¬
mained relatively stable, despite a large increase in the
number of HMDA lenders in the market.
In response to the commenter’s concern regarding a de¬
cline in the percentage of FleetBoston’s lending to LMI
borrowers between 1995 and 1999 in the Rochester MSA,
FleetBoston noted that the percentage decline is mislead¬
ing because of the relatively high percentage of
FleetBoston’s loans that are made without collecting in¬
come data. FleetBoston’s percentage of loans made with¬
out income data was 34 percent in 1999; the industry's
percentage was 5.5 percent. FleetBoston noted that when
the loans without income data are excluded, FleetBoston's
adjusted percentage of loans to LMI borrowers of 31 per¬
cent is comparable to the industry's adjusted percentage
of 34 percent.
With respect to refinancing loans in the Rochester MSA,
FleetBoston noted that the demand for refinance loans
across the industry was exceptionally strong in 1998 and
1999. Moreover, FleetBoston noted that from 1998 to
1999, the number of FleetBoston's home purchase and
home improvement loans increased, while the number of
refinance loans decreased.
FleetBoston also provided data indicating that its denial
ratios for African-American and Hispanic applicants for all
types of HMDA lending in the Rochester MSA during the
period from 1995 to 1995 were generally comparable to
or more favorable than the industry averages. Additionally,
FleetBoston noted that the number of applications re¬
ceived from African-Americans and Hispanics increased
from 1998 to 1999.
Finally, FleetBoston pointed out that its small business
lending performance in Monroe County was comparable
to or better than the industry average in terms of percent¬
age of its loans originated in LMI census tracts and the
Quarterly J ournal, Vol. 20, No. 2, J une 2001 79
dollar volume of these loans. Further, FleetBoston noted
that within Monroe County, it performed better than the
industry in terms of the percentage of loans and the dollar
volume of these loans made to businesses with a gross
annual revenue of less than $1 million.
OCC examiners reviewed FleetBoston’s responses to the
comments above and found the data presented to be
accurate and reliable. 19 In addition, the OCC conducted a
fair lending examination of Fleet Mortgage Corporation in
the fourth quarter of 2000 and found no evidence of dis¬
crimination. 20 FleetBoston has stated that FleetBoston’s
fair lending policies and oversight functions will be re¬
tained for the combined bank.
2. Comments Regarding Summit Banks
While the OCC did not receive any comments regarding
Summit Banks, the Federal Reserve Bank of Boston re¬
ceived comments concerning Summit-PA's CRA record of
performance in the Scranton/Wilkes-Barre/Hazleton MSA
and in Lehigh Valley. 21 Since the OCC does not have the
authority to examine Summit Banks, OCC examiners re¬
viewed the most recent CRA Public Evaluation (PE) of the
Pennsylania bank, the relevant HMDA data and the
banks' responses. The OCC took into account the strong
overall CRA performance of Summit-PA noted in its recent
PE. The OCC found no evidence concerning Summit-PA's
CRA performance that would cast doubt on approval of
the merger. FleetBoston has indicated its goal of continu¬
ing the “outstanding” CRA record of Summit Banks and
working with communities to provide loans, investments,
and services to LMI people.
With respect to the Scranton MSA, the commenter ex¬
pressed concerns that the region had not received its fair
share of Summit Banks’ lending or investments to benefit
19 It is important to note that HMDA data alone are inadequate to
provide a basis for concluding that a bank is engaged in lending
discrimination or in indicating whether its level of lending is suffi¬
cient. HMDA data do not take into consideration borrower capacity,
housing prices, and other factors relevant in each of the individual
markets and do not illustrate the full range of the bank’s lending
activities or efforts. Nevertheless, denial disparity ratios are of con¬
cern to the OCC and are routinely evaluated in fair lending exami¬
nations.
20 Fleet Mortgage Corporation generates the bulk of Fleet’s home
purchase and refinance loans.
21 The Federal Reserve Bank of Boston also received a comment
expressing concerns with the level of lending in Asbury Park, New
Jersey. Summit Banks’ response disputed certain lending data
cited by the commenter. In any event, Asbury Park comprises a
very small portion of the New York-Northern New Jersey-Long Is¬
land, New York-New Jersey-Connecticut-Pennsylvania Consoli¬
dated Metropolitan Statistical Area (CMSA). The CRA evaluation of
Summit Bank, Hackensack, New Jersey, dated October 4, 1999,
found no weaknesses in performance within this CMSA.
LMI people and communities. The commenter also ex¬
pressed a concern that the level of community reinvest¬
ment activity may further be reduced since FleetBoston's
headquarters is so far away.
FleetBoston’s response addressing these allegations pro¬
vided details of qualifying grants and investments and
community development loans over the past few years.
FleetBoston pointed out that the MSA contained only two
low-income census tracts with only 23 owner-occupied
housing units. In addition, FleetBoston provided data de¬
scribing Summit-PA's record of small business lending
record in the Scranton MSA.
With respect to the Lehigh Valley, the commenter ex¬
pressed concerns with a decline in mortgage lending to
minorities and a lack of mortgage originations in the mar¬
ket. The commenter also expressed concerns with the
level of contributions to nonprofits and community organi¬
zations. FleetBoston’s response indicated that the bank's
decline in mortgage lending was largely due to the exo¬
dus of Summit Banks' mortgage staff in Pennsylvania,
which in turn led to a decline in mortgage originations.
Summit Banks represented that they are now a hiring a
mortgage representative to work with nonprofit-based af¬
fordable housing agencies to increase lending to LMI ap¬
plicants. In addition to using the resources available at
Fleet Mortgage Corporation, FleetBoston will further en¬
hance its mortgage lending to LMI individuals by adding
an additional affordable mortgage representative in Penn¬
sylvania after the merger. FleetBoston’s response also in¬
dicated that contrary to the allegations, Summit Banks'
level of contributions to nonprofits and community organi¬
zations had increased in 2000 over 1999 levels.
3. Conclusion Regarding Record of CRA
Performance
Accordingly, based on the banks' records of CRA perfor¬
mance, we find that approval of the merger is consistent
with the Community Reinvestment Act.
Retention of Subsidiaries and
Nonconforming Assets
As part of the merger application, Fleet has represented
that the Summit Banks hold various assets, including cer¬
tain subsidiaries engaged in insurance agency activities,
and certain other equity interests, that are impermissible
for national banks.
Fleet has proposed that it retain certain existing Summit
Bank insurance agencies as financial subsidiaries. There¬
fore, pursuant to section 121 of the Gramm-Leach-Bliley
Act, Pub. Law No. 106-102, 113 Stat. 1338 (1999) (the
GLB Act) and the procedures set forth in the OCC’s re-
80 Quarterly J ournal, Vol. 20, No. 2, J une 2001
vised regulation on financial subsidiaries (12 CFR 5.39),
Fleet provided formal notice of its intent to acquire and
hold as financial subsidiaries of Fleet, Summit Insurance
Advisors, LLC, and its affiliate, Philadelphia Benefits, LLC.
Fleet has previously obtained approval of its financial sub¬
sidiary certification in connection with its conversion of
FCCS Insurance Agency. 22 Both entities are currently sub¬
sidiaries of Summit-NJ and offer insurance products and
insurance brokerage services to individuals and busi¬
nesses.
Financial subsidiaries may engage in activities that are
“financial in nature.” The OCC's regulations governing fi¬
nancial subsidiary activities provide that financial subsid¬
iaries may “[e]ngag[e] as agent or broker in any state for
purposes of insuring, guaranteeing, or indemnifying
against loss, harm, damage, illness, disability, death, de¬
fects in title, or providing annuities as agent or broker.” 23
Fleet has represented that the activities of these subsidiar¬
ies are authorized for financial subsidiaries of national
banks by the OCC. In addition, Fleet represents that it
meets the qualification standards for owning a financial
subsidiary under 12 USC 24a(a)(2)(C)(D) and (E), and 12
CFR 5.39(g).
Fleet has represented the following: (1) Fleet and its de¬
pository institution affiliates are well capitalized and well
managed and will continue to be so following the pro¬
posed transaction; (2) Fleet and its depository institution
affiliates each received a rating of “satisfactory or better”
in their most recent examination under the CRA; (3) the
aggregate consolidated total assets of all financial subsid¬
iaries do not exceed 45 percent of the bank's consoli¬
dated total assets or $50 billion; and (4) Fleet is one of the
100 largest insured banks and has at least one issue of
outstanding eligible debt that is currently rated in one of
the three highest investment grade rating categories by a
nationally recognized statistical rating agency. See 12
22 See OCC approval letter dated April 26, 2000 (2000-ML-08-
015).
23 12 CFR 5.39(e)(1)(H).
USC 24a(a)(4) and 12 CFR 5.39(g)(3). Therefore, Fleet
may hold an interest in the subsidiaries currently held by
Summit-NJ.
With respect to other equity interests held by Summit
Banks that are impermissible for national banks, Fleet has
committed that it will divest any marketable securities
within 30 days of the consummation of the merger and will
divest any other equity securities currently held by Summit
Banks, but not permissible for national banks, within two
years of the date of consummation of the merger.
Conclusion and Approval
For the reasons set forth above, including the representa¬
tions and commitments of the applicants, we find that the
proposed merger between Fleet and the Summit Banks is
authorized as an interstate merger transaction under the
Riegle-Neal Act, 12 USC 215a-1 and 1831u(a); that Fleet,
as the resulting bank after the merger, is authorized to
retain and operate the Providence, Rhode Island, office as
its main office and the other offices as branches, under 12
USC 36(d) and 1831 u(d)(1); Fleet is in satisfactory condi¬
tion; and the proposal is consistent with the Community
Reinvestment Act.
Accordingly, the merger application is hereby approved
subject to the following conditions:
1) Fleet shall comply with the divestiture agreement be¬
tween Fleet and the Department of Justice dated January
25, 2001.
2) Within 30 days of the consummation, Fleet shall divest
of all marketable securities. Within two years of consum¬
mation, Fleet shall divest or bring into conformance, all
remaining nonconforming Summit Banks assets.
These conditions to the approval are conditions “imposed
in writing by the agency in connection with the granting of
any application or other request” within the meaning of 12
USC 1818.
[Application Control Number: 2000-ML-02-0032]
Quarterly J ournal, Vol. 20, No. 2, J une 2001 81
Nonaffiliated mergers (continued)
Title and location (charter number) Total assets
South Carolina
The National Bank of South Carolina, Sumter (010660). 1,860,708,000
and Carolina Southern Bank, Spartanburg . 212,410,000
merged on February 16, 2001 under the title of The National Bank of South Carolina, Sumter (010660). 2,073,118,000
Texas
First National Bank, Alpine (024185). 43,338,000
and West Texas National Bank, Apline (014643). 228,985,000
merged on January 19, 2001 under the title of West Texas National Bank, Alpine (024185). 275,943,000
Comptroller's Decision
Introduction
On October 16, 2000, application was made to the Office
of the Comptroller of the Currency (OCC), pursuant to the
Bank Merger Act, 12 USC 1828(c), for prior authorization
for West Texas National Bank, Alpine, Texas (WTNB), to
consolidate with First National Bank, Alpine, Texas (FNB),
under the title of West Texas National Bank, Charter Num¬
ber 24185.
The Financial Institutions Involved
As of September 30, 2000, WTNB, located in Alpine,
Texas, had total assets of $229 million and total deposits
of $202 million. On the same date, FNB, located in Semi¬
nole, Texas, had total assets of $43 million and total de¬
posits of $36 million. FNB is currently a state bank, FNB
Bank, located in Seminole, Texas. FNB Bank has applied
to the Texas Department of Banking to relocate its head
office from Seminole, Texas, to Alpine, Texas, prior to the
consolidation with WTNB.
Competitive Analysis
The relevant geographic market for this proposal consists
of the area including and immediately surrounding the
community of Seminole, Texas. This is the area from which
FNB and WTNB’s Seminole branch derive the bulk of their
deposits. The area has a population of approximately
6,500. The OCC considers an area with such a small
population to be economically insignificant from a com¬
petitive standpoint. (See Decision of the Comptroller of
the Currency on the application to merge The National
Bank and Trust Company of Norwich, Norwich, New York,
with National Bank of Oxford, Oxford, New York, dated
April 8, 1983.) Because the OCC does not recognize the
market as being economically significant, any
anticompetitive effects resulting from this transaction are
considered de minimis.
Banking Factors
The Bank Merger Act requires this office to consider
“.. . the financial and managerial resources and future
prospects of the existing and proposed institutions, and
the convenience and needs of the community to be
served.” We find that the financial and managerial re¬
sources of both institutions do not raise concerns that
would cause the application to be disapproved. The fu¬
ture prospects of the combined entity are considered fa¬
vorable and the resulting bank is expected to meet the
convenience and needs of the community to be served.
Community Reinvestment Act (CRA)
A review of the record of this application and other infor¬
mation available to this office as a result of its regulatory
responsibilities has revealed no evidence that the appli¬
cants' record of helping to meet the credit needs of their
communities, including low- and moderate-income neigh¬
borhoods, is less than satisfactory. Neither bank has en¬
tered into any commitments with community
organizations, civic associations, or other entities regard¬
ing providing banking services to the relevant community.
No change in community services is planned.
FNB has only one banking office. As a state bank, FNB
will relocate its head office 239 miles to the head office of
WTNB prior to the bank conversion and bank consolida¬
tion. The current head office of FNB in Seminole, Texas,
will be consolidated with an existing branch of WTNB in
Seminole, Texas (within the same market area), shortly
after the consolidation is consummated. The CRA area will
not be expanded.
Conclusion
We have analyzed this proposal pursuant to the Bank
Merger Act (12 USC 1828) and find that it will not signifi¬
cantly lessen competition in the relevant market. Other
factors considered in evaluating this proposal are satis¬
factory. Accordingly, the application is approved.
[Application control number 2000-SW-02-0035]
82 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Nonaffiliated mergers (continued)
Title and location (charter number)
Southwest Bank of Texas National Association, Houston (017479).
and Citizens Bank and Trust Company of Baytown, Texas, Bayton .
and Baytown State Bank, Baytown.
and Pasadena State Bank, Pasadena.
merged on December 29, 2000 under the title of Southwest Bank of Texas National Association, Houston (017479)..
First National Bank in Munday, Munday (013593).
and Home State Bank, Rochester.
merged on December 29, 2000 under the title of First National Bank in Munday, Munday (013593).
Wisconsin
The First National Bank and Trust Company of Beloit, Beloit (002725).
and Macktown State Bank, Rockton.
merged on February 23, 2001 under the title of The First National Bank and Trust Company of Beloit, Beloit (002725)
Total assets
3,260,427,000
285,451,000
83,922,000
34,491,000
3,665,521,000
26,397,000
24,753,000
49,958,000
266,660,000
80,896,000
340,061,000
Quarterly J ournal, Vol. 20, No. 2, J une 2001 83
Nonaffiliated mergers—thrift (mergers consummated involving nonaffiliated national banks and savings and
loan associations), from J anuary 1 to March 31, 2001
Title and location (charter number) Total assets
Missouri
Bank Midwest, National Association, Kansas City (022015). 2,260,200,000
and The Cameron Savings and Loan Association, A FSB, Cameron. 267,077,000
merged on January 12, 2001 under the title of Bank Midwest, National Association, Kansas City (022015). 2,527,277,000
Comptroller's Decision
Introduction
On October 26, 2000, application was made to the Comp¬
troller of the Currency for prior authorization to merge The
Cameron Savings & Loan Association, Cameron, Missouri
64429 (hereinafter Cameron S&L), into Bank Midwest, Na¬
tional Association, Kansas City, Missouri 64105 (hereinaf¬
ter Bank Midwest), under the charter and the title of Bank
Midwest. This application was based on an agreement
entered into between the proponents on October 26,
2000 .
Participating Financial Institutions
As of June 30, 2000, Cameron S&L, a federal savings and
loan, had total deposits of $147.7 million and operated
four offices. On the same date, Bank Midwest had total
deposits of $1.3 billion and operated multiple offices in
both Missouri and Kansas. Bank Midwest is 100 percent-
owned and -controlled by Dickinson Financial Corpora¬
tion, a multi-bank holding company.
Competitive Analysis
The relevant geographic markets for this proposal include
the Kansas City and Nodaway County banking markets
(as defined by the Federal Reserve Bank of Kansas City).
Each relevant geographic market consists of an area sur¬
rounding one or more branches to be acquired. These are
the two areas where competition between Bank Midwest
and Cameron is direct and immediate.
Kansas City Banking Market. The OCC reviewed the
competitive effects of the proposed merger in the Kansas
City market by using its standard procedures for deter¬
mining whether a business combination clearly has mini¬
mal or no adverse competitive effects. For this market, the
OCC finds that the proposal satisfies the criteria for a
merger that clearly has no or minimal adverse competitive
effects.
Nodaway County Banking Market. Six banks currently
compete for approximately $430 million in deposits in the
Nodaway County banking market, which consist of
Nodaway County and the town of Stanberry in Gentry
County. As of June 30, 1999, Bank Midwest was the sec¬
ond largest depository institution in the Nodaway County
banking market with $96 million in deposits (or a 22 per¬
cent market share of deposits). Cameron S&L was the
sixth largest depository institution with $20 million in de¬
posits (or a 5 percent market share of deposits). After the
transaction, Bank Midwest will remain the second largest
depository institution in the market with a 27 percent mar¬
ket share. Nodaway Valley Bancshares, Inc., will remain
the market's largest competitor with approximately $169
million in deposits (or a 39 percent market share of de¬
posits). While the resulting bank eliminates one competitor
in the Nodaway County banking market, any adverse ef¬
fects would be mitigated by the presence of four other
banking alternatives. Therefore, consummation of this pro¬
posal would not have a significantly adverse effect on
competition in this relevant geographic market.
Banking Factors
The Bank Merger Act requires the OCC to consider
. . the financial and managerial resources and future
prospects of the existing and proposed institutions, and
the convenience and needs of the community to be
served.” We find that the financial and managerial re¬
sources of Cameron S&L and Bank Midwest do not raise
concerns that would cause the application to be disap¬
proved. The future prospects of the proponents, individu¬
ally and combined, are considered favorable. Both banks
have facilities in Marysville, and after merger, Cameron
S&L's facility will consolidate into Bank Midwest's. As the
facilities are only one-half block apart, there is minimal
disruption to Cameron S&L's customers. The resulting
bank will continue to offer a wide variety of products and
services and it is expected to meet the convenience and
needs of the community to be served.
Community Reinvestment Act
A review of the record of this application and other infor¬
mation available to the OCC as a result of its regulatory
84 Quarterly J ournal, Vol. 20, No. 2, J une 2001
responsibilities has revealed no evidence that the appli¬
cants' records of helping to meet the credit needs of their
communities, including low- and moderate-income neigh¬
borhoods, is less than satisfactory.
Conclusion
We have analyzed this proposal pursuant to the Bank
Merger Act (12 USC 1828(c)) and/or 12 CFR 5.33, and
find that it will not lessen significantly competition in any
relevant market. Other factors considered in evaluating
this proposal are satisfactory. Accordingly, the application
is approved.
[Application control number: 2000-MW-020048]
Quarterly J ournal, Vol. 20, No. 2, J une 2001 85
Affiliated mergers (mergers consummated involving affiliated banks), from J anuary 1 to March 31, 2001
Title and location (charter number) Total assets
California
Valley Merchants Bank, National Association, Hemet (022078). 61,588,000
and BBOC Interim Bank, San Bernardino. 240,000
merged on August 31, 2000 under the title of Valley Merchants Bank, National Association, Hemet (022078). 61,588,000
Florida
First National Bank of Naples, Naples (021830). 814,525,000
and Cape Coral National Bank, Cape Coral (022723). 373,945,000
and First National Bank of Fort Myers, Fort Myers (021643). 107,391,000
merged on February 16, 2001 under the title of First National Bank of Naples, Naples (021830). 1,295,861,000
West Coast Guaranty Bank, National Association, Sarasota (023829). 281,138,000
and First National Bank of Florida, Clearwater (023498). 350,021,000
merged on February 16, 2001 under the title of West Coast Guaranty Bank, National Association, Sarasota (023829). 631,159,000
Illinois
First National Bank of Blue Island, Blue Island (012779) . 251,472,000
and Bank of Homewood, National Association, Homewood (024145). 330,405,000
merged on February 16, 2001 under the title of Great Lakes Bank, National Association, Blue Island (012779). 581,877,000
Bank One, National Association, Chicago (000008) . 98,120,032,000
and Bank One, Louisiana, National Association, Baton Rouge (013655). 11,427,487,000
and Bank One, Texas, National Association, Dallas (021969). 31,319,925,000
merged on February 8, 2001 under the title of Bank One, National Association, Chicago (000008). 140,810,579,000
Indiana
Old National Trust Company, Terre Haute (022729). 2,888,000
and Old National Trust Company—Illinois, Mt. Carmel (022809). 975,000
and Old National Trust Company—Kentucky, Morganfield (022810). 687,000
merged on December 31,2000 under the title of Old National Trust Company, Terre Haute (022729). 4,212,000
Old National Banks, Evansville (008846). 8,536,949,000
and Orange County Bank, Paoli. 112,827,000
merged on March 8, 2001 under the title of Old National Bank Evansville (008846). 8,649,776,000
Iowa
The National Bank, Bettendorf (024171). 5,000,000
and First Illinois National Bank, Savanna (013886) . 83,000,000
merged on January 22, 2001 under the title of The National Bank, Bettendorf (024171). 88,000,000
Kansas
Community National Bank, Chanute (021389). 129,026,000
and First State Bank, Edna. 71,346,000
merged on December 31, 2000 under the title of Community National Bank, Chanute (021389). 200,372,000
Teambank, National Association, Paola (003350). 369,896,000
and lola Bank and Trust Company, lola. 85,992,000
merged on February 24, 2001 under the title of TeamBank, National Association, Paola (003350). 465,006,000
Louisiana
Whitney National Bank, New Orleans (014977) . 5,811,000,000
and First National Bank of Gonzales, Gonzales (015041). 89,000,000
merged on February 9, 2001 under the title of Whitney National Bank, New Orleans (014977). 5,900,000,000
Whitney National Bank, New Orleans (014977) . 6,240,312,000
and American Bank, Houston . 274,930,000
merged on March 9, 2001 under the title of Whitney National Bank, New Orleans (014977). 6,517,092,000
Missouri
Commerce Bank, National Association, Kansas City (018112). 9,139,975,000
and The Centennial Bank, Breckenridge Hills. 272,232,000
merged on March 1, 2001 under the title of Commerce Bank, National Association, Kansas City (018112). 9,411,956,000
86 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Affiliated mergers (continued)
Title and location (charter number) Total assets
New York
NBT Bank, National Association, Norwich (001354). 1,495,971,000
and PennStar Bank, National Association, Scranton (009886). 1,020,841,000
merged on March 16, 2001 under the title of NBT Bank, National Association, Norwich (001354). 2,516,812,000
North Dakota
Community First National Bank, Fargo (005087) . 5,782,671,000
and Community First State Bank, Vermillion. 269,090,000
merged on March 22, 2001 under the title of Community First National Bank, Fargo (005087). 6,020,760,000
Oklahoma
The American National Bank and Trust Company of Sapulpa, Oklahoma, Sapulpa (007788). 272,564,000
and FHeritage Bank, Mannford. 80,254,000
merged on March 2, 2001 under the title of The American National Bank and Trust Company of Sapulpa, Oklahoma,
Sapulpa (007788). 352,763,000
Pennsylvania
National Penn Bank, Boyertown (002137). 2,264,162,000
and Bernville Bank, National Association, Bernvilie (017721). 105,281,000
merged on January 4, 2001 under the title of National Penn Bank, Boyertown (002137). 2,369,443,000
First National Trust Company, Flermitage (023778). 904,000
and First National Interim Trust Company, Flermitage (023211). 240,000
merged on February 16, 2001 under the title of First National Trust Company, Flermitage (023778). 904,000
First National Bank of Pennsylvania, Greenville (000249). 1,325,149,000
and Reeves Bank, Beaver Falls. 176,282,000
merged on March 16, 2001 under the title of First National Bank of Pennsylvania, Greenville (000249). 1,491,431,000
Tennessee
First Tennessee Bank National Association, Memphis (000336). 18,293,677,000
and Cleveland Bank and Trust Company, Cleveland. 267,186,000
merged on March 23, 2001 under the title of First Tennessee Bank, National Association, Memphis (000336). 18,547,805,000
Texas
Bank of Texas, National Association, Dallas (024082). 1,095,482,000
and Citizens National Bank of Texas, Bellaire (017954) . 424,483,000
merged on January 5, 2001 under the title of Bank of Texas, National Association, Dallas (024082). 1,567,438,000
State National Bank of West Texas, Lubbock (023117). 216,836,000
and State National Bank of West Texas, Abilene (017614). 478,071,000
merged on March 9, 2001 under the title of State National Bank of West Texas, Lubbock (023117). 694,907,000
Utah
Zions First National Bank, Salt Lake City (004341). 8,080,294,000
and Draper Bank, Draper. 260,597,000
merged on January 26, 2001 under the title of Zions First National Bank, Salt Lake City (004341). 8,340,891,000
Quarterly J ournal, Vol. 20, No. 2, J une 2001 87
Affiliated mergers—thrift (mergers consummated involving affiliated national banks and savings and loan
associations), from J anuary 1 to March 31, 2001
Title and location (charter number) Total assets
Iowa
Wells Fargo Bank Iowa, National Association, Des Moines (002307). 6,100,550,000
and Brenton Bank, Des Moines. 1,954,495,000
and Brenton Savings Banks, FSB, Ames. 219,368,000
merged on March 24, 2001 under the title of Wells Fargo Bank Iowa, National Association, Des Moines (002307). 8,069,987,000
Kentucky
Community Trust Bank, National Association, Pikeville (007030). 2,066,478,000
and Community Trust Bank FSB, Campbellsville. 180,095,000
merged on December 29, 2000 under the title of Community Trust Bank, National Association, Pikeville (007030). 2,212,715,000
Missouri
Bank Midwest, National Association, Kansas City (022015). 2,260,200,000
and Hardin Federal Savings and Loan Association, Hardin. 134,059,000
merged on February 16, 2001 under the title of Bank Midwest, National Association, Kansas City (022015). 2,394,259,000
88 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Tables on the Financial Performance of
National Banks
Page
lAssets. liabilities, and capital accounts of national banks. March 31. 2000 and March 31.2000. 91 I
Quarterly income and expenses of national banks, first quarter 2000 and first quarter 2001 . 92
Year-to-date income and expenses ot national banks, through March 31, 2000 and through
March 31,2001. 93
|Assets ot national banks by asset size, March 31, 2001 . 94 |
Past-due and nonaccrual loans and leases of national banks by asset size, March 31, 2001 . 95
Liabilities of national banks by asset size, March 31,2001 . 96
Off-balance-sheet items of national banks by asset size, March 31, 2001 . 97
Quarterly income and expenses of national banks by asset size, first quarter 2001 . . 98
Year-to-date income and expenses of national banks by asset size, through March 31, 2001 . 99”
Quarterly net loan and lease losses of national banks by asset size, first quarter 2001 . 100
Year-to-date net loan and lease losses of national banks by asset size, through March 31, 2001 . 101
INumber of national banks by state and asset size, March 31, 2001 . 102 I
[Total assets of national banks by state and asset size, March 31, 2001 . 103
Quarterly J ournal, Vol. 20, No. 2, J une 2001 89
Assets, liabilities, and capital accounts of national banks
March 31, 2000 and March 31, 2001
(Dollar figures in millions)
March 31,
2000
March 31,
2001
Change
March 31, 2000-
March 31, 2001
fully consolidated
Consolidated
foreign and
domestic
Consolidated
foreign and
domestic
Amount
Percent
Number of institutions.
2,327
2,201
(126)
(5.41)
Total assets.
$3,301,903
$3,440,218
$138,315
4.19
Cash and balances due from depositories.
180,855
186,080
5,225
2.89
Noninterest-bearing balances, currency and coin.
136,015
136,866
850
0.63
Interest bearing balances.
44,839
49,214
4,375
9.76
Securities.
533,927
487,081
(46,847)
(8.77)
Held-to-maturity securities, amortized cost.
48,077
30,476
(17,601)
(36.61)
Available-for-sale securities, fair value.
485,850
456,604
(29,246)
(6.02)
Federal funds sold and securities purchased.
109,446
130,353
20,906
19.10
Net loans and leases.
2,103,406
2,210,892
107,486
5.11
Total loans and leases.
2,141,396
2,251,533
110,138
5.14
Loans and leases, gross.
2,143,095
2,253,069
109,975
5.13
Less: Unearned income.
1,699
1,536
(163)
(9.59)
Less: Reserve for losses.
37,989
40,641
6.98
Assets held in trading account.
102,612
117,761
14.76
Other real estate owned.
1,533
1,639
106
6.90
Intangible assets.
77,993
76,643
(1,349)
(1.73)
All other assets.
192,131
229,769
37,638
19.59
Total liabilities and equity capital.
3,301,903
3,440,218
138,315
4.19
Deposits in domestic offices.
1,785,434
1,871,693
86,258
4.83
Deposits in foreign offices.
381,183
390,533
9,350
2.45
Total deposits.
2,166,617
2,262,226
95,609
4.41
Noninterest-bearing deposits.
417,018
428,145
11,127
2.67
Interest-bearing deposits.
1,749,599
1,834,081
84,482
4.83
Federal funds purchased and securities sold.
266,506
228,825
(37,680)
(14.14)
Other borrowed money.
331,342
360,811
29,469
8.89
Trading liabilities less revaluation losses.
16,690
27,421
10,731
64.30
Subordinated notes and debentures.
57,034
65,850
8,815
15.46
All other liabilities.
160,511
188,910
28,399
17.69
Trading liabilities revaluation losses.
59,167
64,116
4,949
8.36
Other.
101,344
124,794
23,450
23.14
Total equity capital.
281,214
306,175
24,961
8.88
Perpetual preferred stock.
924
583
(341)
(36.87)
Common stock.
14,692
13,370
(1,323)
(9.00)
Surplus.
150,959
159,976
9,017
5.97
Retained earnings and other comprehensive income ..
115,606
134,506
18,899
16.35
Other equity capital components.
0
33
33
NM
NM indicates calculated percent change is not meaningful.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 91
Quarterly income and expenses of national banks
First quarter 2000 and first quarter 2001
(Dollar figures in millions)
First
quarter
2000
First
quarter
2001
Change
First quarter, 2000-
first quarter, 2001
fully consolidated
Consolidated
foreign and
domestic
Consolidated
foreign and
domestic
Amount
Percent
Number of institutions.
2,327
2,201
(126)
(5.41)
Net income.
$11,536
$11,434
($101)
(0.88)
Net interest income.
29,119
29,745
626
2.15
Total interest income.
57,721
61,278
3,557
6.16
On loans.
44,451
47,502
3,051
6.86
From lease financing receivables.
1,681
2,023
342
20.35
On balances due from depositories.
729
819
90
12.40
On securities.
8,812
8,084
(728)
(8.26)
From assets held in trading account.
677
958
281
41.54
On federal funds sold and securities repurchased .
1,371
1,707
336
24.50
Less: Interest expense.
28,603
31,533
2,930
10.25
On deposits.
18,444
20,905
2,461
13.34
Of federal funds purchased and securities sold.
3,546
3,298
(248)
(7.00)
On demand notes and other borrowed money*.
5,665
6,222
556
9.82
On subordinated notes and debentures.
947
1,108
161
17.01
Less: Provision for losses.
4,114
5,321
1,208
29.35
Noninterest income.
24,703
25,053
349
1.41
From fiduciary activities.
2,580
2,131
(449)
(17.41)
Service charges on deposits.
3,749
4,002
254
6.76
Trading revenue.
1,809
2,153
344
19.01
From interest rate exposures.
780
1,081
301
38.53
From foreign exchange exposures.
733
828
95
12.92
From equity security and index exposures.
282
187
(95)
NM
From commodity and other exposures.
13
57
44
NM
Total other noninterest income.
16,566
16,767
201
1.21
Gains/losses on securities.
(701)
466
1,167
NM
Less: Noninterest expense.
31,088
32,164
1,076
3.46
Salaries and employee benefits.
12,524
12,657
133
1.06
Of premises and fixed assets.
3,952
3,867
(85)
(2.15)
Other noninterest expense.
14,613
14,354
(258)
(1.77)
Less: Taxes on income before extraordinary items.
6,401
6,074
(326)
(5.10)
Income/loss from extraordinary items, net of income taxes ...
16
(270)
(286)
NM
Memoranda:
Net operating income.
11,978
11,393
(585)
(4.88)
Income before taxes and extraordinary items.
17,920
17,779
(141)
(0.79)
Income net of taxes before extraordinary items.
11,519
11,704
185
1.61
Cash dividends declared.
6,723
7,042
319
4.74
Net charge-offs to loan and lease reserve.
3,639
4,797
1,159
31.84
Charge-offs to loan and lease reserve.
4,588
5,783
1,195
26.05
Less: Recoveries credited to loan and lease reserve.
949
986
36
3.83
* Includes mortgage indebtedness
NM indicates calculated percent change is not meaningful.
92 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Year-to-date income and expenses of national banks
Through March 31, 2000 and through March 31, 2001
(Dollar figures in millions)
March 31,
2000
March 31,
2001
Change
March 31, 2000-
March 31, 2001
fully consolidated
Consolidated
foreign and
domestic
Consolidated
foreign and
domestic
Amount
Percent
Number of institutions.
2,327
2,201
(126)
(5.41)
Net income.
$11,536
$11,434
($101)
(0.88)
Net interest income.
29,119
29,745
626
2.15
Total interest income.
57,721
61,278
3,557
6.16
On loans.
44,451
47,502
3,051
6.86
From lease financing receivables.
1,681
2,023
342
20.35
On balances due from depositories.
729
819
90
12.40
On securities.
8,812
8,084
(728)
(8.26)
From assets held in trading account.
677
958
281
41.54
On federal funds sold and securities repurchased .
1,371
1,707
336
24.50
Less: Interest expense.
28,603
31,533
2,930
10.25
On deposits.
18,444
20,905
2,461
13.34
Of federal funds purchased and securities sold.
3,546
3,298
(248)
(7.00)
On demand notes and other borrowed money*.
5,665
6,222
556
9.82
On subordinated notes and debentures.
947
1,108
161
17.01
Less: Provision for losses.
4,114
5,321
1,208
29.35
Noninterest income.
24,703
25,053
349
1.41
From fiduciary activities.
2,580
2,131
(449)
(17.41)
Service charges on deposits.
3,749
4,002
254
6.76
Trading revenue.
1,809
2,153
344
19.01
From interest rate exposures.
780
1,081
301
38.53
From foreign exchange exposures.
733
828
95
12.92
From equity security and index exposures.
282
187
(95)
(33.66)
From commodity and other exposures.
13
57
44
332.79
Total other noninterest income.
16,566
16,767
201
1.21
Gains/losses on securities.
(701)
466
1,167
NM
Less: Noninterest expense.
31,088
32,164
1,076
3.46
Salaries and employee benefits.
12,524
12,657
133
1.06
Of premises and fixed assets.
3,952
3,867
(85)
(2.15)
Other noninterest expense.
14,613
14,354
(258)
(1.77)
Less: Taxes on income before extraordinary items.
6,401
6,074
(326)
(5.10)
Income/loss from extraordinary items, net of income taxes ...
16
(270)
(286)
NM
Memoranda:
Net operating income.
11,978
11,393
(585)
(4.88)
Income before taxes and extraordinary items.
17,920
17,779
(141)
(0.79)
Income net of taxes before extraordinary items.
11,519
11,704
185
1.61
Cash dividends declared.
6,723
7,042
319
4.74
Net charge-offs to loan and lease reserve.
3,639
4,797
1,159
31.84
Charge-offs to loan and lease reserve.
4,588
5,783
1,195
26.05
Less: Recoveries credited to loan and lease reserve.
949
986
36
3.83
* Includes mortgage indebtedness
NM indicates calculated percent change is not meaningful.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 93
Assets of national banks by asset size
March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Total assets.
$3,440,218
$55,058
$249,701
$417,491
$2,717,968
$6,310,814
Cash and balances due from.
186,080
2,902
10,940
19,162
153,075
361,859
Securities.
487,081
13,335
59,042
86,104
328,600
1,047,974
Federal funds sold and securities purchased.
130,353
3,942
12,265
18,633
95,512
327,400
Net loans and leases.
2,210,892
32,217
153,939
260,904
1,763,832
3,763,480
Total loans and leases.
2,251,533
32,655
156,104
266,130
1,796,644
3,828,145
Loans and leases, gross.
2,253,069
32,715
156,323
266,242
1,797,790
3,830,919
Less: Unearned income.
1,536
60
220
111
1,145
2,774
Less: Reserve for losses.
40,641
438
2,164
5,227
32,812
64,665
Assets held in trading account.
117,761
0
62
903
116,796
320,242
Other real estate owned.
1,639
68
211
155
1,206
3,053
Intangible assets.
76,643
153
1,461
6,029
69,000
103,545
All other assets.
229,769
2,440
11,780
25,602
189,947
383,261
Gross loans and leases by type:
Loans secured by real estate.
918,720
18,912
97,455
136,952
665,401
1,699,384
1-4 family residential mortgages.
457,331
8,726
41,207
62,927
344,471
795,907
Flome equity loans.
86,033
460
4,006
9,023
72,544
130,123
Multifamily residential mortgages.
28,676
411
3,467
4,882
19,916
60,960
Commercial RE loans.
223,943
5,436
35,080
42,293
141,135
469,305
Construction RE loans.
82,998
1,697
9,547
15,787
55,966
173,709
Farmland loans.
12,395
2,182
4,143
1,892
4,178
34,269
RE loans from foreign offices.
27,344
0
5
148
27,191
35,111
Commercial and industrial loans.
650,357
5,664
28,611
52,207
563,875
1,045,503
Loans to individuals.
366,413
4,439
20,632
58,613
282,730
597,505
Credit cards*.
152,686
160
3,346
25,801
123,378
216,527
Other revolving credit plans.
19,823
102
566
1,790
17,365
26,680
Installment loans.
193,904
4,178
16,720
31,021
141,986
354,299
All other loans and leases.
317,580
3,700
9,625
18,470
285,784
488,527
Securities by type:
U.S. Treasury securities.
22,601
942
3,468
4,617
13,574
55,593
Mortgage-backed securities.
249,056
3,183
18,951
46,022
180,900
493,838
Pass-through securities.
173,390
2,176
11,658
29,491
130,065
316,638
Collateralized mortgage obligations.
75,666
1,007
7,293
16,531
50,836
177,200
Other securities.
186,322
9,154
36,125
32,338
108,704
427,875
Other U.S. government securities.
69,540
6,369
21,272
15,287
26,612
209,415
State and local government securities.
42,473
2,197
10,694
8,648
20,933
93,754
Other debt securities.
66,724
445
3,105
7,588
55,586
106,607
Equity securities.
7,585
144
1,053
815
5,573
18,099
Memoranda:
Agricultural production loans.
21,064
3,190
4,819
3,186
9,870
46,238
Pledged securities.
229,952
5,220
27,765
44,072
152,895
510,671
Book value of securities.
483,577
13,197
58,386
85,425
326,569
1,038,927
Available-for-sale securities.
453,101
10,733
49,503
74,026
318,839
935,150
Fleld-to-maturity securities.
30,476
2,465
8,882
11,399
7,730
103,777
Market value of securities.
487,449
13,373
59,184
86,189
328,703
1,049,277
Available-for-sale securities.
456,604
10,870
50,160
74,705
320,870
944,197
Fleld-to-maturity securities.
30,844
2,503
9,024
11,484
7,833
105,080
'Previously banks reported “Credit card & related plans.” Starting with 2001 this item will be split into separate categories, “Credit cards" and
“Other revolving credit plans.”
94 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Past-due and nonaccrual loans and leases of national banks by asset size
March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Loans and leases past due 30-89 days.
$27,226
$509
$2,067
$3,649
$21,001
$47,254
Loans secured by real estate.
12,426
253
1,090
1,503
9,580
20,961
1-4 family residential mortgages.
7,883
133
530
734
6,487
12,008
Home equity loans.
754
4
31
89
630
1,112
Multifamily residential mortgages.
200
3
29
41
128
391
Commercial RE loans.
1,883
53
316
385
1,129
4,080
Construction RE loans.
1,050
31
121
215
683
2,162
Farmland loans.
215
29
64
40
82
586
RE loans from foreign offices.
441
0
0
0
441
622
Commercial and industrial loans.
4,692
111
441
734
3,407
9,175
Loans to individuals.
7,719
90
405
1,208
6,015
12,854
Credit cards.
3,759
3
106
587
3,062
5,505
Installment loans and other plans.
3,960
87
299
621
2,953
7,349
All other loans and leases.
2,389
55
131
205
1,999
4,265
Loans and leases past due 90+ days.
7,071
101
376
1,109
5,485
11,546
Loans secured by real estate.
2,071
48
179
244
1,600
3,433
1-4 family residential mortgages.
1,468
26
86
132
1,225
2,208
Home equity loans.
114
1
4
13
97
189
Multifamily residential mortgages.
21
0
7
6
8
36
Commercial RE loans.
258
12
54
59
132
549
Construction RE loans.
138
3
14
29
93
280
Farmland loans.
39
6
14
5
14
128
RE loans from foreign offices.
32
0
0
0
32
43
Commercial and industrial loans.
652
25
75
144
408
1,444
Loans to individuals.
3,963
14
99
696
3,153
6,043
Credit cards.
2,870
2
60
535
2,273
3,897
Installment loans and other plans.
1,093
13
39
161
881
2,145
All other loans and leases.
385
14
23
25
324
626
Nonaccrual loans and leases.
22,266
219
967
1,618
19,462
34,446
Loans secured by real estate.
7,046
109
519
786
5,632
11,377
1-4 family residential mortgages.
3,643
37
164
302
3,140
5,314
Home equity loans.
256
0
12
22
222
390
Multifamily residential mortgages.
97
1
11
23
62
203
Commercial RE loans.
1,638
41
234
293
1,070
3,157
Construction RE loans.
610
9
59
118
424
1,214
Farmland loans.
153
21
39
27
65
365
RE loans from foreign offices.
647
0
0
0
647
735
Commercial and industrial loans.
11,547
68
306
650
10,523
17,554
Loans to individuals.
1,466
14
78
111
1,263
2,354
Credit cards.
414
0
37
52
325
822
Installment loans and other plans.
1,052
14
42
59
937
1,532
All other loans and leases.
2,274
27
64
73
2,109
3,259
Quarterly J ournal, Vol. 20, No. 2, J une 2001 95
Liabilities of national banks by asset size
March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Total liabilities and equity capital.
$3,440,218
$55,058
$249,701
$417,491
$2,717,968
$6,310,814
Deposits in domestic offices.
$1,871,693
$46,354
$201,664
$267,987
$1,355,687
$3,512,628
Deposits in foreign offices.
390,533
0
257
2,220
388,056
671,096
Total deposits.
2,262,226
46,354
201,921
270,208
1,743,743
4,183,723
Noninterest bearing.
428,145
7,043
29,903
45,376
345,823
721,932
Interest bearing.
1,834,081
39,311
172,018
224,832
1,397,920
3,461,791
Other borrowed funds.
360,811
1,344
11,623
51,007
296,838
568,003
Subordinated notes and debentures.
65,850
10
138
2,891
62,811
90,522
All other liabilities.
188,910
586
3,676
10,408
174,241
347,103
Equity capital.
306,175
6,240
25,419
39,084
235,431
546,240
Total deposits by depositor:
Individuals and corporations.
1,740,962
30,219
142,728
214,013
1,354,002
3,229,877
U.S., state, and local governments.
79,368
3,786
14,380
15,243
45,960
166,032
Depositories in the U.S.
49,537
374
1,354
413
47,396
82,918
Foreign banks and governments.
69,952
3
365
1,030
68,555
117,881
Domestic deposits by depositor:
Individuals and corporations.
1,452,068
30,219
142,678
212,362
2,729,740
U.S., state, and local governments.
79,368
3,786
14,380
15,243
45,960
166,032
Depositories in the U.S.
6,745
374
1,354
364
4,653
15,491
Foreign banks and governments.
11,275
3
158
517
10,596
15,056
Foreign deposits by depositor:
Individuals and corporations.
288,894
0
50
1,651
287,193
500,136
Depositories in the U.S.
42,793
0
0
49
42,743
67,427
Foreign banks and governments.
58,678
0
207
513
57,958
102,825
Deposits in domestic offices by type:
Transaction deposits.
347,964
13,331
47,502
42,924
244,208
638,590
Demand deposits.
284,110
6,989
27,542
34,068
215,510
489,658
Savings deposits.
864,506
9,376
57,446
119,926
677,759
1,504,365
Money market deposit accounts.
615,730
5,220
35,330
82,240
492,940
1,056,930
Other savings deposits.
248,776
4,156
22,116
37,686
184,819
447,435
Time deposits.
659,222
23,648
96,717
105,137
433,720
1,369,673
Small time deposits.
390,725
16,225
62,835
63,772
247,892
795,134
Large time deposits.
268,497
7,422
33,882
41,365
185,828
574,540
96 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Off-balance-sheet items of national banks by asset size
March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Unused commitments.
$3
,194,703
$82,649
$326,106
$271,995
$2,513,952
$4,553,287
Home equity lines.
139,833
367
3,842
9,952
125,673
187,465
Credit card lines.
1
,937,573
78,321
298,070
211,285
1,349,897
2,600,749
Commercial RE, construction and land .
77,438
988
6,979
12,584
56,886
151,217
All other unused commitments.
1
,039,859
2,974
17,216
38,173
981,496
1,613,857
Letters of credit:
Standby letters of credit.
150,777
138
1,440
5,632
143,567
251,311
Financial letters of credit.
120,920
90
893
4,112
115,825
206,504
Performance letters of credit.
29,857
48
548
1,520
27,741
44,807
Commercial letters of credit.
16,319
24
503
554
15,237
23,902
Securities lent.
83,147
14
135
5,929
77,069
535,095
Spot foreign exchange contracts.
190,545
0
18
35
190,493
410,135
Credit derivatives (notional value)
Reporting bank is the guarantor.
42,143
0
20
7
42,116
166,799
Reporting bank is the beneficiary.
78,363
0
0
0
78,363
185,655
Derivative contracts (notional value) .
16
,521,375
62
2,106
39,578
16,479,628
43,921,632
Futures and forward contracts.
4
,889,948
47
131
3,593
4,886,177
10,651,750
Interest rate contracts.
2
,426,718
47
92
3,149
2,423,430
5,611,946
Foreign exchange contracts.
2
,388,241
0
39
444
2,387,758
4,886,072
All other futures and forwards.
74,990
0
0
0
74,990
153,731
Option contracts.
3
,537,286
10
1,336
10,441
3,525,499
9,277,683
Interest rate contracts.
2
,929,147
10
1,336
10,412
2,917,389
7,583,758
Foreign exchange contracts.
414,088
0
0
2
414,086
893,477
All other options.
194,050
0
0
28
194,023
800,448
Swaps.
7
,973,635
5
619
25,538
7,947,473
23,639,745
Interest rate contracts.
7
,578,372
5
617
20,494
7,557,256
22,526,952
Foreign exchange contracts.
343,160
0
2
4,941
338,217
971,472
All other swaps.
52,103
0
0
103
51,999
141,320
Memoranda: Derivatives by purpose
Contracts held for trading.
15
,551,237
0
0
9,225
15,542,012
42,392,131
Contracts not held for trading .
849,632
62
2,086
30,346
817,137
1,177,047
Memoranda: Derivatives by position
Held for trading—positive fair value.
213,218
0
1
86
213,132
588,328
Held for trading—negative fair value.
207,878
0
0
80
207,797
578,277
Not for trading—positive fair value.
10,527
0
13
401
10,113
14,027
Not for trading—negative fair value.
5,129
0
11
199
4,919
8,176
Quarterly J ournal, Vol. 20, No. 2, J une 2001 97
Q uarterly income and expenses of national banks by asset size
First quarter 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Net income.
$11,434
$146
$817
$1,499
$8,973
$19,878
Net interest income.
29,745
545
2,416
4,116
22,668
51,813
Total interest income.
61,278
1,033
4,670
8,002
47,573
109,606
On loans.
47,502
757
3,546
6,188
37,011
81,035
From lease financing receivables.
2,023
3
28
82
1,910
2,919
On balances due from depositories.
819
12
30
42
735
1,910
On securities.
8,084
208
908
1,398
5,569
16,743
From assets held in trading account.
958
0
1
16
941
2,571
On fed. funds sold & securities repurchased.
1,707
49
137
230
1,291
4,049
Less: Interest expense.
31,533
487
2,255
3,886
24,905
57,793
On deposits.
20,905
460
1,991
2,431
16,024
39,862
Of federal funds purchased & securities sold.
3,298
8
90
602
2,597
6,519
On demand notes & other borrowed money*.
6,222
19
171
806
5,226
9,885
On subordinated notes and debentures.
1,108
0
3
47
1,058
1,527
Less: Provision for losses.
5,321
30
171
562
4,558
7,938
Noninterest income.
25,053
231
1,348
2,798
20,676
40,150
From fiduciary activities.
2,131
17
145
403
1,566
4,991
Service charges on deposits.
4,002
67
262
402
3,271
6,165
Trading revenue.
2,153
0
2
62
2,089
3,985
From interest rate exposures.
1,081
0
2
51
1,028
1,876
From foreign exchange exposures.
828
0
0
2
825
1,329
From equity security and index exposures.
187
0
0
9
178
705
From commodity and other exposures.
57
0
0
0
57
71
Total other noninterest income.
16,767
146
939
1,931
13,750
25,009
Gains/losses on securities.
466
5
25
71
365
1,171
Less: Noninterest expense.
32,164
553
2,439
4,122
25,050
54,991
Salaries and employee benefits.
12,657
267
1,032
1,452
9,906
23,086
Of premises and fixed assets.
3,867
70
296
436
3,064
6,842
Other noninterest expense.
14,354
212
1,073
2,041
11,028
23,342
Less: Taxes on income before extraord. items.
6,074
51
364
794
4,865
9,990
Income/loss from extraord. items, net of taxes.
(270)
0
2
(8)
(264)
(335)
Memoranda:
Net operating income.
11,393
143
797
1,459
8,994
19,379
Income before taxes and extraordinary items.
17,779
197
1,179
2,301
14,102
30,204
Income net of taxes before extraordinary items.
11,704
146
815
1,507
9,236
20,214
Cash dividends declared.
7,042
86
354
1,124
5,478
13,450
Net loan and lease losses.
4,797
16
120
508
4,152
6,968
Charge-offs to loan and lease reserve.
5,783
24
167
629
4,962
8,459
Less: Recoveries credited to loan & lease resv.
986
8
47
121
810
1,491
’Includes mortgage indebtedness
98 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Year-to-date income and expenses of national banks by asset size
Through March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Net income.
$11,434
$146
$817
$1,499
$8,973
$19,878
Net interest income.
29,745
545
2,416
4,116
22,668
51,813
Total interest income.
61,278
1,033
4,670
8,002
47,573
109,606
On loans.
47,502
757
3,546
6,188
37,011
81,035
From lease financing receivables.
2,023
3
28
82
1,910
2,919
On balances due from depositories.
819
12
30
42
735
1,910
On securities.
8,084
208
908
1,398
5,569
16,743
From assets held in trading account.
958
0
1
16
941
2,571
On fed. funds sold & securities repurchased.
1,707
49
137
230
1,291
4,049
Less: Interest expense.
31,533
487
2,255
3,886
24,905
57,793
On deposits.
20,905
460
1,991
2,431
16,024
39,862
Of federal funds purchased & securities sold.
3,298
8
90
602
2,597
6,519
On demand notes & other borrowed money*.
6,222
19
171
806
5,226
9,885
On subordinated notes and debentures.
1,108
0
3
47
1,058
1,527
Less: Provision for losses.
5,321
30
171
562
4,558
7,938
Noninterest income.
25,053
231
1,348
2,798
20,676
40,150
From fiduciary activities.
2,131
17
145
403
1,566
4,991
Service charges on deposits.
4,002
67
262
402
3,271
6,165
Trading revenue.
2,153
0
2
62
2,089
3,985
From interest rate exposures.
1,081
0
2
51
1,028
1,876
From foreign exchange exposures.
828
0
0
2
825
1,329
From equity security and index exposures.
187
0
0
9
178
705
From commodity and other exposures.
57
0
0
0
57
71
Total other noninterest income.
16,767
146
939
1,931
13,750
25,009
Gains/losses on securities.
466
5
25
71
365
1,171
Less: Noninterest expense.
32,164
553
2,439
4,122
25,050
54,991
Salaries and employee benefits.
12,657
267
1,032
1,452
9,906
23,086
Of premises and fixed assets.
3,867
70
296
436
3,064
6,842
Other noninterest expense.
14,354
212
1,073
2,041
11,028
23,342
Less: Taxes on income before extraord. items.
6,074
51
364
794
4,865
9,990
Income/loss from extraord. items, net of taxes.
(270)
0
2
(8)
(264)
(335)
Memoranda:
Net operating income.
11,393
143
797
1,459
8,994
19,379
Income before taxes and extraordinary items.
17,779
197
1,179
2,301
14,102
30,204
Income net of taxes before extraordinary items.
11,704
146
815
1,507
9,236
20,214
Cash dividends declared.
7,042
86
354
1,124
5,478
13,450
Net loan and lease losses.
4,797
16
120
508
4,152
6,968
Charge-offs to loan and lease reserve.
5,783
24
167
629
4,962
8,459
Less: Recoveries credited to loan & lease resv.
986
8
47
121
810
1,491
’Includes mortgage indebtedness
Quarterly J ournal, Vol. 20, No. 2, J une 2001 99
Quarterly net loan and lease losses of national banks by asset size
First quarter 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Net charge-offs to loan and lease reserve.
$4,797
$16
$120
$508
$4,152
$6,968
Loans secured by real estate.
361
1
12
48
299
489
1-4 family residential mortgages.
157
1
6
17
132
207
Home equity loans.
71
0
1
21
50
81
Multifamily residential mortgages.
4
(0)
(0)
0
4
5
Commercial RE loans.
79
0
4
6
68
120
Construction RE loans.
24
0
1
5
19
44
Farmland loans.
9
0
(0)
0
9
10
RE loans from foreign offices.
18
0
0
0
18
21
Commercial and industrial loans.
1,623
6
24
82
1,511
2,346
Loans to individuals.
2,489
8
80
363
2,039
3,668
Credit cards.
1,743
1
50
280
1,413
2,588
Installment loans and other plans.
746
7
30
84
626
1,080
All other loans and leases.
324
1
5
14
303
466
Charge-offs to loan and lease reserve.
5,783
24
167
629
4,962
8,459
Loans secured by real estate.
461
2
18
60
381
630
1-4 family residential mortgages.
208
1
9
22
176
275
Home equity loans.
80
0
1
22
57
94
Multifamily residential mortgages.
5
0
0
0
4
7
Commercial RE loans.
105
1
7
9
88
158
Construction RE loans.
32
0
1
6
24
56
Farmland loans.
10
0
0
0
9
13
RE loans from foreign offices.
23
0
0
0
23
26
Commercial and industrial loans.
1,840
9
34
100
1,698
2,686
Loans to individuals.
3,077
11
107
448
2,510
4,557
Credit cards.
2,020
1
63
328
1,628
3,034
Installment loans and other plans.
1,057
10
44
120
882
1,523
All other loans and leases.
404
2
9
20
373
587
Recoveries credited to loan and lease reserve.
986
8
47
121
810
1,491
Loans secured by real estate.
100
1
6
12
81
141
1-4 family residential mortgages.
51
0
2
5
43
68
Home equity loans.
9
0
0
1
7
13
Multifamily residential mortgages.
1
0
0
0
1
3
Commercial RE loans.
26
0
3
4
19
38
Construction RE loans.
8
0
0
2
6
12
Farmland loans.
1
0
0
0
0
3
RE loans from foreign offices.
5
0
0
0
5
5
Commercial and industrial loans.
217
2
10
18
187
340
Loans to individuals.
587
4
27
85
472
888
Credit cards.
277
0
13
48
216
445
Installment loans and other plans.
310
3
14
37
256
443
All other loans and leases.
81
1
4
6
70
122
100 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Year-to-date net loan and lease losses of national banks by asset size
Through March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
Number of institutions reporting.
2,201
1,071
955
134
41
8,237
Net charge-offs to loan and lease reserve.
4,797
16
120
508
4,152
6,968
Loans secured by real estate.
361
1
12
48
299
489
1-4 family residential mortgages.
157
1
6
17
132
207
Home equity loans.
71
0
1
21
50
81
Multifamily residential mortgages.
4
(0)
(0)
0
4
5
Commercial RE loans.
79
0
4
6
68
120
Construction RE loans.
24
0
1
5
19
44
Farmland loans.
9
0
(0)
0
9
10
RE loans from foreign offices.
18
0
0
0
18
21
Commercial and industrial loans.
1,623
6
24
82
1,511
2,346
Loans to individuals.
2,489
8
80
363
2,039
3,668
Credit cards.
1,743
1
50
280
1,413
2,588
Installment loans and other plans.
746
7
30
84
626
1,080
All other loans and leases.
324
1
5
14
303
466
Charge-offs to loan and lease reserve.
5,783
24
167
629
4,962
8,459
Loans secured by real estate.
461
2
18
60
381
630
1-4 family residential mortgages.
208
1
9
22
176
275
Home equity loans.
80
0
1
22
57
94
Multifamily residential mortgages.
5
0
0
0
4
7
Commercial RE loans.
105
1
7
9
88
158
Construction RE loans.
32
0
1
6
24
56
Farmland loans.
10
0
0
0
9
13
RE loans from foreign offices.
23
0
0
0
23
26
Commercial and industrial loans.
1,840
9
34
100
1,698
2,686
Loans to individuals.
3,077
11
107
448
2,510
4,557
Credit cards.
2,020
1
63
328
1,628
3,034
Installment loans and other plans.
1,057
10
44
120
882
1,523
All other loans and leases.
404
2
9
20
373
587
Recoveries credited to loan and lease reserve.
986
8
47
121
810
1,491
Loans secured by real estate.
100
1
6
12
81
141
1-4 family residential mortgages.
51
0
2
5
43
68
Home equity loans.
9
0
0
1
7
13
Multifamily residential mortgages.
1
0
0
0
1
3
Commercial RE loans.
26
0
3
4
19
38
Construction RE loans.
8
0
0
2
6
12
Farmland loans.
1
0
0
0
0
3
RE loans from foreign offices.
5
0
0
0
5
5
Commercial and industrial loans.
217
2
10
18
187
340
Loans to individuals.
587
4
27
85
472
888
Credit cards.
277
0
13
48
216
445
Installment loans and other plans.
310
3
14
37
256
443
All other loans and leases.
81
1
4
6
70
122
Quarterly J ournal, Vol. 20, No. 2, J une 2001 101
Number of national banks by state and asset size
March 31, 2001
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
All institutions.
2,201
1,071
955
134
41
8,237
Alabama.
23
12
10
1
0
158
Alaska.
3
1
0
2
0
6
Arizona.
18
6
7
2
3
44
Arkansas.
40
12
27
1
0
185
California.
81
31
40
8
2
302
Colorado.
56
34
19
2
1
181
Connecticut.
8
3
5
0
0
25
Delaware.
16
2
9
2
3
32
District of Columbia.
5
2
3
0
0
6
Florida.
77
28
41
8
0
263
Georgia.
67
33
32
1
1
337
Flawaii.
1
0
1
0
0
8
Idaho.
1
0
1
0
0
16
Illinois.
191
80
99
8
4
708
Indiana.
31
8
16
5
2
153
Iowa.
46
26
18
2
0
428
Kansas.
107
77
27
3
0
375
Kentucky.
51
25
23
3
0
229
Louisiana.
16
8
6
1
1
144
Maine.
6
1
4
1
0
15
Maryland.
15
6
7
2
0
72
Massachusetts.
12
4
6
2
0
43
Michigan .
28
11
15
1
1
165
Minnesota.
127
80
43
1
3
491
Mississippi.
20
8
10
2
0
101
Missouri.
47
26
18
3
0
360
Montana.
18
14
2
2
0
84
Nebraska.
78
57
19
2
0
277
Nevada.
8
2
2
4
0
32
New Hampshire.
6
2
2
1
1
15
New Jersey.
26
3
15
8
0
80
New Mexico.
15
6
7
2
0
53
New York.
61
12
40
8
1
145
North Carolina.
9
2
3
1
3
76
North Dakota.
16
7
6
3
0
109
Ohio.
90
41
35
8
6
208
Oklahoma.
101
62
35
4
0
285
Oregon.
4
1
2
1
0
42
Pennsylvania.
88
23
56
6
3
184
Rhode Island.
3
1
0
1
1
7
South Carolina.
24
15
8
1
0
75
South Dakota.
18
9
7
1
1
93
Tennessee .
29
8
18
1
2
196
Texas.
351
210
133
7
1
698
Utah.
8
2
3
2
1
57
Vermont.
11
3
7
1
0
18
Virginia.
35
13
20
2
0
144
Washington.
15
11
4
0
0
74
West Virginia.
23
9
11
3
0
70
Wisconsin.
51
23
25
3
0
304
Wyoming .
20
11
8
1
0
46
U.S. territories.
0
0
0
0
0
18
102 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Total assets of national banks by state and asset size
March 31, 2001
(Dollar figures in millions)
All
national
banks
National banks
Memoranda:
All
commercial
banks
Less than
$100
million
$100
million to
$1 billion
$1 billion
to $10
billion
Greater
than $10
billion
All institutions.
$3,440,218
$55,058
$249,701
$417,491
$2,717,968
$6,310,814
Alabama.
3,836
744
2,057
1,035
0
184,871
Alaska.
5,043
59
0
4,984
0
6,020
Arizona.
59,696
186
2,813
4,770
51,927
63,035
Arkansas.
7,619
665
5,952
1,001
0
26,343
California.
194,214
1,580
11,373
21,657
159,604
331,690
Colorado.
27,127
1,727
4,550
4,806
16,044
46,933
Connecticut.
1,229
238
991
0
0
3,581
Delaware.
106,862
161
3,061
4,143
99,498
151,644
District of Columbia.
675
74
601
0
0
754
Florida.
26,683
1,693
9,645
15,346
0
61,158
Georgia.
27,059
1,795
7,425
4,996
12,843
169,967
Flawaii.
301
0
301
0
0
23,995
Idaho.
233
0
233
0
0
2,567
Illinois.
273,982
3,997
24,559
22,339
223,087
402,643
Indiana.
61,012
436
5,920
16,966
37,690
86,510
Iowa.
16,205
1,475
4,476
10,253
0
45,608
Kansas .
19,324
3,678
7,722
7,924
0
38,261
Kentucky.
22,974
1,651
4,335
16,988
0
51,999
Louisiana.
24,939
468
1,212
6,630
16,629
40,983
Maine.
5,915
27
1,496
4,391
0
7,781
Maryland.
5,853
377
2,056
3,419
0
46,035
Massachusetts.
9,394
263
1,380
7,751
0
109,436
Michigan .
17,043
469
3,612
1,214
11,746
143,804
Minnesota.
158,214
3,732
11,690
2,379
140,413
181,212
Mississippi.
10,358
389
2,087
7,882
0
35,109
Missouri.
25,826
1,372
5,849
18,605
0
65,227
Montana.
3,631
601
432
2,598
0
11,045
Nebraska.
16,123
2,640
4,545
8,938
0
29,662
Nevada.
22,660
62
355
22,244
0
34,501
New Hampshire.
21,797
58
370
4,813
16,556
23,981
New Jersey.
31,935
199
4,763
26,973
0
70,109
New Mexico.
10,451
325
2,825
7,301
0
14,742
New York.
424,797
757
11,572
16,598
395,869
1,366,069
North Carolina.
858,850
132
1,255
3,061
854,402
954,394
North Dakota.
12,021
302
1,754
9,965
0
17,906
Ohio.
289,654
2,076
10,236
16,315
261,027
361,920
Oklahoma.
25,462
3,136
7,020
15,305
0
44,242
Oregon.
9,602
5
531
9,066
0
17,107
Pennsylvania.
142,145
1,407
16,644
9,342
114,752
182,464
Rhode Island.
206,472
8
0
5,577
200,887
216,118
South Carolina.
5,212
775
2,286
2,151
0
24,398
South Dakota.
28,308
328
2,447
8,393
17,140
36,464
Tennessee .
65,883
591
5,457
7,328
52,506
87,935
Texas.
81,742
10,323
31,831
18,494
21,094
136,216
Utah.
25,114
58
818
9,984
14,254
110,447
Vermont.
3,269
188
2,072
1,009
0
7,511
Virginia.
12,465
795
5,370
6,299
0
63,295
Washington.
1,782
547
1,235
0
0
15,529
West Virginia.
10,373
482
2,132
7,758
0
17,570
Wisconsin.
14,635
1,453
6,990
6,192
0
79,523
Wyoming .
4,221
552
1,364
2,305
0
7,571
U.S. territories.
0
0
0
0
0
52,930
Quarterly J ournal, Vol. 20, No. 2, J une 2001 103
Chief Financial Officer's Annual Report—2000
Chief Financial Officer's Message
I am pleased to present the Office of the Comptroller of
the Currency's Annual Report for the year ending Decem¬
ber 31, 2000. The Annual Report provides a discussion of
OCC’s program and financial activities for the year as well
as our financial statements and related independent audi¬
tors' report.
Financial management initiatives implemented during
2000 resulted in significant improvements in managing
our resources and in strengthening our internal controls:
• Our financial statements received an unqualified
“clean” opinion with no material weaknesses;
• Accounting principles generally accepted for federal
entities and standard federal budget object class
codes were adopted to ensure compliance with report¬
ing requirements for government agencies;
• Funds control processes provide management with
more accurate, reliable, and timely financial informa¬
tion;
• Expanded reporting processes strengthen manage¬
ment accountability over budget execution; and
• New revenue forecasting techniques provide more ac¬
curate revenue projections and more detailed account¬
ing of actual versus projected revenues.
During 2001 we will be implementing phase I of the
OCC’s management accountability reporting tool
(“$MART’). $MART is an integrated financial management
system designed to support management by providing
users with accurate, reliable, and timely financial informa¬
tion.
We are proud of our accomplishments to date and will
continue our efforts to strengthen controls and modernize
processes to better serve our customers and provide ac¬
curate and reliable information to our stakeholders.
Edward J. Hanley
Senior Deputy Comptroller and
Chief Financial Officer
Quarterly J ournal, Vol. 20, No. 2, J une 2001 105
Contents
ll. Management’s Discussion and Analysis _ 1071
1. Mission and Organization Structure 107l
v. Performance GaaEg Objectives, and Results TTT71
R Financial Management Dismission 333
14. Systems. Controls and I egal Onmpliance 1171
lh. Annual Assurance Statement—F’OOO 1111
III. Auditor's Report 1121
III. Financial Statements 119
106 Quarterly J ournal, Vol. 20, No. 2, J une 2001
I. Management's Discussion and
Analysis
1. Mission and Organization Structure
The Office of the Comptroller of the Currency (OCC) char¬
ters, regulates, and supervises national banks to ensure a
safe, sound, and competitive banking system that sup¬
ports the citizens, communities, and economy of the Un¬
tied States.
The Comptroller’s office manages a nationwide staff of
bank examiners and other professional and support per¬
sonnel who examine and supervise federally chartered
national banks and federally licensed branches and agen¬
cies of foreign banks. The Comptroller receives advice on
policy and operational issues from an Executive Commit¬
tee that consists of the First Senior Deputy Comptroller
and Chief Counsel, Chief of Staff, the Ombudsman, and
the senior executives of Bank Supervision Operations,
Bank Supervision Policy, International and Economic Af¬
fairs, Public Affairs, Management, and Information Tech¬
nology. The OCC mission is supported with the following
programs:
• The OCC’s licensing process involves ongoing activi¬
ties that result in the chartering or liquidation of national
banks as well as evaluation of the permissibility of
structures and activities of national banks and their
subsidiaries.
• The OCC's rulemaking process consists of ongoing
activities that result in the establishment of regulations,
policies, operating guidance, and interpretations of
general applicability to national banks.
• The OCC's bank supervision process consists of on¬
going supervision and enforcement activities under¬
taken to ensure each national bank is operating in a
safe and sound manner and is complying with appli¬
cable laws, rules and regulations relative to the bank
and the customers and communities it serves.
• The OCC’s analysis process consists of ongoing ac¬
tivities that identify, analyze, and respond to emerging
systemic risks and market trends that could impact the
safety and soundness of national banks; the national
banking system or groups of national banks; the finan¬
cial services industry; or the economic and regulatory
environment in which banks operate.
• The OCC’s resource management process consists of
those ongoing activities related to prudently managing
OCC’s human, financial, physical, and technology re¬
sources in a manner designed to ensure that OCC pro¬
grams achieve their intended results in an efficient and
effective manner.
• The OCC’s external relations process consists of the
activities of discrete organizational functions that edu¬
cate key agency stakeholders, facilitate their interac¬
tions with the OCC or its national bank clientele, or
advance specific OCC policy interests to targeted ex¬
ternal audiences.
2. Performance Goals, Objectives, and
Results
Strategic Goal: A Safe and Sound National
Banking System
The OCC maintains a proactive focus to identify potential
problems in banking. Our supervisory practices are both
up-to-date and adaptable to the rapid evolution of highly
complex new products and services being offered by the
banking industry. Delivery of information tools and re¬
sources to our examination staff continues to improve, in¬
cluding ongoing implementation of the Large Bank
Information System (LBIS) and the OCC’s early warning,
“Canary” system. This system brings together an array of
supervisory and economic predictive tools to help identify
potential risks to the national banking system as a whole
as well as to individual banks. Examiners participate in a
wide range of training initiatives to enhance their examin¬
ing skills, including training in problem bank supervision,
internet banking, credit, liquidity/interest rate risk, etc.
Our Ombudsman's findings on supervisory appeals along
with information from banker and bank customer feed¬
back are communicated throughout the agency.
Within the context of the economic environment, the OCC
continues to minimize the impact and/or number of bank
failures with prompt supervisory action including timely
enforcement actions and coordination of failure resolution
policies and procedures with the Federal Deposit Insur¬
ance Corporation (FDIC).
The OCC measures performance as follows:
Performance measure
2000 target
2000 actual
Percentage of bank examinations
conducted on schedule (FDICIA
examination exceptions after 6/30/00
limited to those related to conversions,
mergers, system conversions, etc.)
100%
98% a
Percentage of critical work completed
on large-bank, mid-size bank, and
federal branch and agency strategies
100%
100%
Percentage of enforcement actions
against banks that meet policy time
frames; i.e. the time frame from the
date the supervisory office initiates the
recommendation for action to the date
the action is completed (signed by the
bank)
90%
72% b
Quarterly J ournal, Vol. 20, No. 2, J une 2001 107
Performance measure
2000 target
2000 actual
Percentage of 4- and 5-rated banks
with enforcement actions (formal and
informal) in place or pending
100%
100%
Percentage of quarterly reviews
completed for year 2000 conversion
100%
100%
Percent of examination questionnaires
submitted by bankers that are
analyzed within 90 days of the close
of the evaluation period and
disseminated throughout the agency
100%
100%
Supervision 2000 project plan met
Develop
project
plan, 100%
of
milestones
met
100% of
milestones
met c
Perform quality assurance reviews of
the effectiveness of training related to
structurally weak loans
Complete
Complete
Provide shared credit training to
examiners per schedule
Provide
training
Training
provided
Notes:
a Examination guidelines that allowed examiners to delay
community bank safety and soundness exams for up to 90 days in
low risk banks were in effect until 6/30/00. During 2000, 98% of
exams were conducted within time frames of examination
guidelines.
b The current policy time frames measure action dates that are not
within OCC control. For example, the current time frames say that
enforcement actions will be completed within 45 days of the date
they are initiated. OCC controls when the action is presented to the
bank for signature, but OCC does not control when the bank signs
the action (completion of the action). OCC is currently rewriting the
guidelines so that they will apply to actions within the control of the
OCC.
c On target to complete implementation of Examiner View and the
digital examination process.
Strategic Goal: A Flexible, Regulatory Framework
that Enables the National Banking System to
Provide a Full Competitive Array of Financial
Services
The OCC fosters competition by allowing banks to offer
new products and services to their customers so long as
banks have the expertise to manage the risks effectively
and to provide the necessary consumer protections. Our
legal and licensing analyses of new products and ser¬
vices (considering appropriate legal and policy factors)
are timely and allow for appropriate flexibility. Bank safety
and soundness concerns are addressed in the consider¬
ation of new products, activities, corporate structures, and
delivery systems.
Training for new products and services is ongoing. We
continue to develop and implement functional supervision
for new lines of business.
The OCC measures performance as follows:
Performance measure
2000 target
2000 actual
Percentage of on-time performance for
non-protested applications
95%
96%
Percentage of instances where
supervisory concerns are addressed
before new initiatives, products, or
powers are approved
100%
99%
BSOP tracking system will develop
baseline data to gauge participant
satisfaction with outreach programs
Report on
participant
satisfaction
Complete
Project plan for community bank
initiatives finalized, 100% of milestones
met, recommendation implemented
100%
100% of
milestones
had
action
taken*
Note:
* One item is 90% complete and all others are 100% complete.
Recommendations are in various states of review and
implementation.
Strategic Goal: Fair Access to Financial Services
and Fair Treatment of Bank Customers
The OCC ensures fair access to financial services for
all Americans by enforcing the Community Reinvestment
Act (CRA) and fair lending laws, encouraging national
bank involvement in community development activities,
and assuring fair treatment of bank customers and
compliance with the consumer protection laws. We pur¬
sue initiatives that eliminate impediments to access to
banking services for certain segments of the population,
especially small businesses, low-income individuals, rural
individuals and businesses, and victims of illegal discrimi¬
nation.
Our efforts to ensure fair access to banking services have
reduced impediments that deny customers fair access.
OCC plans to proceed with outreach programs that de¬
velop awareness and improve fair access to banking ser¬
vices. We provide information and analysis to banks to
increase their knowledge and awareness of available
community development activities. Information is provided
to banks on affordable housing, financing for minority
small businesses, Native American initiatives, and other
community and economic development activities.
Customer complaints and Customer Assistance Group
data are monitored and analyzed to identify trends that
are used in developing OCC policies and positions. We
continue efforts to lead financial institutions in the devel¬
opment of sound procedures and processes in the arena
of customer information privacy.
108 Quarterly J ournal, Vol. 20, No. 2, J une 2001
The OCC measures performance as follows:
Performance measure
2000 target
2000 actual
Average number of days to process
consumer complaints
45
51
Percentage of requests for consumer
complaint information provided within
30 days of the request, or by the
requested date if longer than 30 days,
with copies of the information to the
bank and appropriate bank
supervision operations office
95% within
time frame
90% within
time frame
Publish final privacy regulations as
required by new legislation
Complete
Complete
Complete the proposal for
consortium-owned bank pilot
Complete
Complete
Percentage of time that follow-up
actions are identified and
implementation begins within 60 days
of access meetings
100%
within 60
days
100% within
60 days
Strategic Goal: An Expert, Highly Motivated, and
Diverse Work Force and Efficient Utilization of
Other OCC Resources
The quality of our work environment enables us to retain a
highly motivated workforce. Plans to implement a new
compensation system were finalized signifying our efforts
to ensure employees are compensated commensurate
with their contributions to the agency. The OCC provides
effective training opportunities to OCC personnel to en¬
sure staff experience and expertise is sufficient to carry
out our mission. We continue to monitor and take steps to
address various work-life issues raised by OCC employ¬
ees and have formed a committee to develop and imple¬
ment a strategic plan for active recruitment, retention, and
career development.
Our information technology was expanded and upgraded
to ensure that financial and supervisory data are available
and easier to access agency wide through the implemen¬
tation of customized data marts and improved analysis
tools. A long-term plan will be developed for modernizing
and integrating all major OCC administrative transaction
processing and information systems, including an inte¬
grated planning and budgeting process with automated
tools to facilitate annual performance planning and bud¬
get development.
The OCC maintains and reviews internal controls to com¬
ply with federal standards and to ensure ongoing financial
integrity. Approval of a formal capital budgeting process
is the first step in a lengthy process to improve financial
integrity. Senior management is dedicated to ensure the
ongoing effectiveness of internal financial controls, contin¬
ued compliance with accounting standards, and effective
budgeting and reporting.
The OCC measures performance as follows:
Performance measure
2000 target
2000 actual
Conduct two surveys of Bank
Supervision Operations employees
where results indicate increased
employee satisfaction level
Increase in
satisfaction
Employee
satisfaction
level
decreased
slightly*
Install financial system compliant
with federal financial management
system requirements in year 2001
Procurement
started
Procurement
completed
Receive an unqualified audit opinion
with no material weaknesses
Completed
Completed
ITS operations maintain server
availability to increase access to
OCC data
99.5%
availability
99.8%
availability
Note:
* Employee satisfaction decreased slightly as a result of identified
areas of employee concern. The OCC formed Task Force teams
which analyzed these concerns and developed action plans to
address the issues. The action plans were communicated to
employees and implemented during 2000. A subsequent survey
taken in January 2001 reflected the results of these actions with
improvement noted in all survey categories.
3. Financial Management Discussion
Financial Management Initiatives
The OCC implemented several financial management ini¬
tiatives and improvements during 2000. Accounting prin¬
ciples generally accepted within the United States of
America for Federal reporting entities were adopted to
ensure compliance with reporting requirements for gov¬
ernment agencies. In addition, the OCC implemented the
use of standard federal budget object class (BOC) codes.
New funds control processes provide management with
more accurate, timely, and reliable financial information.
Open obligations and commitments are now included as
components to determine fund availability. Financial data
is tracked at the BOC level, providing detailed information
to help ensure the budget is executed as planned.
New processes were established to enhance manage¬
ment accountability over budget execution. Organizations
are required to review and reconcile system budget re¬
ports with individual unit records monthly to ensure the
accuracy of financial information used by management to
make decisions. A financial performance status report is
presented to the Executive Committee each month for re¬
view.
The OCC also instituted revised revenue forecasting tech¬
niques. These new techniques have resulted in a more
accurate revenue projection and a more detailed account¬
ing of actual versus projected revenues.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 109
Funding Sources and Uses
The revenue of the OCC is derived primarily from assess¬
ments and fees paid by the national banks and from in¬
come on investments in U.S. government securities. The
OCC does not receive congressional appropriations to
fund any of its operations. Funding sources are as follows:
Figure 1—Budget resources collected
Other
Interest 1%
The OCC uses revenues to cover operating costs to sup¬
port its mission. Uses of funds are as follows:
Figure 2—Budget resources used
Other contractual
Limitations of the Financial Statements
The financial statements have been prepared to report the
financial position of the OCC and its net costs, changes in
net positions, budgetary resources, and reconciliation of
net costs to budgetary obligations, pursuant to the re¬
quirements of 31 USC 3535(b). While the statements have
been prepared from the books and records of the OCC in
accordance with the format prescribed by the Office of
Management and Budget, the statements are in addition
to the financial reports used to monitor and control bud¬
getary resources that are prepared from the same books
and records.
The statements should be read with the realization that
they are for the components of the U.S. Government, a
sovereign entity. One implication of this is that liabilities
cannot be liquidated without authorization that provides
resources to do so.
4. Systems, Controls, and Legal
Compliance
The OCC evaluated its system of management control
during 2000. The results indicate that the OCC’s system
of internal management, accounting, and administrative
control, taken as a whole, are sufficient and effective ex¬
cept for the matter noted below.
Financial Management Systems
The OCC’s financial management systems currently do
not comply with Federal financial management systems
requirements and the United States Government Standard
General Ledger at the transaction level. This instance of
nonconformance will be eliminated with the implementa¬
tion of a new financial management system scheduled for
October 1, 2001. The OCC has taken temporary steps to
compensate for the limitations of the current system and
to ensure that the information reported is accurate, reli¬
able, and timely, and that it is in accordance with account¬
ing principles generally accepted in the United States of
America for Federal reporting entities and the United
States Government Standard General Ledger.
This was also reported in OCC’s Annual Assurance State¬
ment for the year 2000, which was signed by the Comp¬
troller of the Currency in January 2001.
110 Quarterly J ournal, Vol. 20, No. 2, J une 2001
5. Annual Assurance Statement—2000
Department of the Treasury
Office of the Comptroller of the Currency
Annual Assurance Statement
2000
As the Comptroller of the Currency, I recognize the importance of management
controls. I have taken the necessary measures to ensure that the evaluation of the
system of management control of the OCC has been conducted in a conscientious
and thorough manner during 2000. The results indicate that the OCC's system of
internal management, accounting and administrative control, taken as a whole, are
sufficient and effective. As a result, I can provide a reasonable assurance that FMFIA
Section 2 objectives are being achieved and a qualified assurance that FMFIA Section
4 objectives have been met. Although at the present time, OCC's financial
management systems do not comply with Federal financial management systems
requirements and the United States Government Standard General Ledger (SGL) at
the transaction level, this situation should be remedied when our new financial
management system is fully operational, which is scheduled to occur October 1, 2001.
John D. Hawke, Jr.
Comptroller of the Currency
Quarterly J ournal, Vol. 20, No. 2, J une 2001 111
II. Auditor's Report
MSBP
2001 M Street, N.W.
Washington, D.C. 20036
Independent Auditors’ Report on Financial Statements
The Comptroller of the Currency:
We have audited the accompanying balance sheet of the Office of the Comptroller of the Currency (OCC)
as of December 31, 2000, and the related statements of net cost, changes in net position, budgetary
resources and financing (hereafter collectively referred to as “financial statements”) for the year then
ended. These financial statements are the responsibility of the OCC’s management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the OCC as of December 31, 2000, and its net costs, changes in net position,
budgetary resources, and reconciliation of net costs to budgetary obligations, for the year then ended, in
conformity with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards, we have also issued reports dated March 30, 2001,
on our consideration of the OCC’s internal control over financial reporting and on its compliance with
certain provisions of laws and regulations. Those reports are an integral part of an audit performed in
accordance with Government Auditing Standards, and should be read in conjunction with this report in
considering the results of our audit.
The information in the Management’s Discussion and Analysis section is not a required part of the
financial statements but is supplementary information required by the Federal Accounting Standards
Advisory Board. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of this information. However, we
did not audit this information, and, accordingly, we express no opinion on it.
Gr LCP
March 30, 2001
KPMG LLR KPMG LLF? a U.S. limited liability partnership, is
a member of KPMG International, a Swiss association.
112 Quarterly J ournal, Vol. 20, No. 2, J une 2001
2001 M Street, N.W.
Washington, D C. 20036
Independent Auditors' Report on Internal Control over Financial Reporting
The Comptroller of the Currency:
We have audited the balance sheet of the Office of the Comptroller of the Currency (OCC) as of
December 31, 2000, and the related statements of net cost, changes in net position, budgetary
resources, and financing, for the year then ended, and have issued our report thereon dated March 30,
2001. We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.
In planning and performing our audit, we considered the OCC’s internal control over financial
reporting by obtaining an understanding of the OCC’s internal control, determining whether internal
controls had been placed in operation, assessing control risk, and performing tests of controls in order
to determine our auditing procedures for the purpose of expressing our opinion on the financial
statements. We limited our internal control testing to those controls necessary to achieve the
objectives described in Government Auditing Standards. We did not test all internal controls as
defined by the Federal Managers’ Financial Integrity Act of 1982. The objective of our audit was not
to provide assurance on the OCC’s internal control. Consequently, we do not provide an opinion on
internal control over financial reporting.
Our consideration of internal control over financial reporting would not necessarily disclose all
matters in the internal control over financial reporting that might be reportable conditions. Under
standards issued by the American Institute of Certified Public Accountants, reportable conditions are
matters coming to our attention relating to significant deficiencies in the design or operation of the
internal control over financial reporting that, in our judgment, could adversely affect the OCC’s
ability to record, process, summarize, and report financial data consistent with the assertions by
management in the financial statements. Material weaknesses are reportable conditions in which the
design or operation of one or more of the internal control components does not reduce to a relatively
low level the risk that misstatements, in amounts that would be material in relation to the financial
statements being audited, may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Because of inherent limitations in any internal
control, misstatements due to error or fraud may occur and not be detected.
We noted certain matters, discussed in Exhibit I, involving the internal control over financial
reporting and its operation that we consider to be reportable conditions. However, none of these
reportable conditions are considered to be material weaknesses. Exhibit II presents the status of prior
year reportable conditions.
KPMG LLP KPMG LLR a U S. limited liability partnership, is
a member of KPMG International, a Swiss association.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 113
Additional Procedures
With respect to internal control related to performance measures determined by management to be
key and reported in the Management’s Discussion and Analysis section of the OCC’s Annual Report,
we obtained an understanding of the design of significant internal controls relating to the existence
and completeness assertions. Our procedures were not designed to provide assurance on internal
control over reported performance measures, and, accordingly, we do not provide an opinion on
internal control related to performance measures.
We also noted other matters involving internal control and its operation that we have reported to the
OCC’s management in a separate letter dated March 30, 2001.
This report is intended solely for the information and use of the OCC’s management, the Department
of Treasury Office of Inspector General, OMB, and Congress, and is not intended to be and should
not be used by anyone other than these specified parties.
ucp
March 30, 2001
114 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Exhibit I
Office of the Comptroller of the Treasury
Reportable Conditions
For Fiscal Year Ended December 31, 2000
1. Adequate controls over Time and Travel Reports (TTRS) disbursements were not in place
We noted examples where the OCC procedures related to TTRS disbursements processing were not
followed. Internal controls over the TTRS disbursements process should be properly designed to
achieve desired control objectives, and subsequently placed in operation. The nature of the OCC’s
operations require its personnel to travel considerably. As such, the controls surrounding the TTRS
process should be operating effectively. In instances where TTRS disbursements controls are not
operating effectively, potential accounting misstatements, irregularities, and other errors may occur.
During our audit, we identified 15 instances, out of a sample of 45 items, where the internal controls
over disbursements were not functioning as designed. The exceptions included inadequate supporting
documentation, inadequate approvals, and untimely approval and submission of expense reports.
Failure to perform certain internal control functions puts the OCC at risk of failing to prevent and
detect errors, fraud, omissions in travel disbursements, and misstated accounting records.
Recommendations
In order to improve internal controls over TTRS disbursements, we recommend the OCC continue to
take action to improve on its performance in monitoring and enforcing time and travel expense
reporting procedures. Such actions should include supervisory and quality control reviews.
2. Internal controls over timekeeping were not adequate
The OCC did not consistently follow its procedures for timekeeping functions relating to certifying
rosters and applications for leave. The inadequate operation of the controls related to timekeeping
and certifying rosters is a weakness that increases the risk of irregularities, fraud, and other errors.
We noted 8 exceptions out of 45 sample items tested. The nature of the errors included inadequate
and untimely leave slip and certifying roster approvals, and inaccurate certifying rosters.
Untimely or inadequate review of certifying rosters increases the risk that errors, fraud, or omissions
in annual leave, sick leave, comp time, etc. will go undetected. In the absence of adequate review and
recording of annual leave slips, the risk of employees taking leave without their annual leave balances
being charged is increased. Furthermore, annual leave slips may be processed with errors if not
adequately reviewed by a supervisor.
Recommendations
We recommend the OCC:
■ Implement procedures to enforce controls surrounding completion, submission, and accounting
for annual leave and certifying rosters.
■ Develop a periodic internal audit program for current employees related to certifying rosters and
annual leave processing. The audits should be performed by personnel not responsible for
entering leave data into the system.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 115
Exhibit II
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Status of Prior Reportable Conditions
5 13 >"! nSl 1 E El > n • >■.
Timely reconciliation of fund balance with
Treasury account with U.S. Treasury records was
not performed.
(Reconciliations for May 99 not completed until Oct
99.)
Improvements were made during calendar year 2000.
The reconciliation was current for most of the year
and completed upon receipt of the monthly TFS 6653,
Statement of Differences from Treasury. Financial
Management (FM) assigned reconciliation tasks to
specific employees effective with the March 2000
reorganization. A monthly supervisory review and
approval sheet was completed and implemented.
Procedures for performing monthly Treasury Fund
Balance reconciliations were documented. However,
during the fourth quarter of the calendar year, the
reconciliations were not completed and reviewed in a
timely manner.
Current year status: Downgraded to a management
letter comment.
The OCC lacks adequate written procedures for
many of its accounting and financial processes.
(Many key policies were still in draft version and
OCC lacked Standard Operating Procedures.)
Improvements to existing draft policies were noted.
According to FM, draft policies and procedures will
be finalized during installation of the new financial
management system, and by December 31, 2001 at the
latest.
Current year status: Downgraded to a management
letter comment.
Internal controls over timekeeping were not
adequate.
(OCC did not consistently follow timekeeping
procedures.)
Although training was provided to timekeepers and
some improvement was made during calendar year
2000, policies and procedures were not being adhered
to consistently.
Current year status: Reportable Condition.
Adequate controls over disbursements were not in
place.
(OCC employees failing to follow procedures
relating to processing disbursements)
Improvements in disbursement processing were noted.
Current year status: Corrected.
116 Quarterly J ournal, Vol. 20, No. 2, J une 2001
2001 M Street, N.W.
Washington, D.C. 20036
Independent Auditors’ Report on Compliance with Laws and Regulations
The Comptroller of the Currency:
We have audited the balance sheet of the Office of the Comptroller of the Currency (OCC) as of
December 31, 2000, and the related statements of net cost, changes in net position, budgetary
resources and financing, for the year then ended, and have issued our report thereon dated March 30,
2001. We conducted our audit in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States.
The OCC’s management is responsible for complying with applicable laws and regulations. As part
of obtaining reasonable assurance about whether the OCC’s financial statements are free of material
misstatement, we performed tests of the OCC’s compliance with certain provisions of laws and
regulations, noncomphance with which could have a direct and material effect on the determination
of the financial statement amounts. We limited our tests of compliance to the provisions described
in the preceding sentence, and we did not test compliance with all laws and regulations applicable to
the OCC. However, providing an opinion on compliance with laws and regulations was not an
objective of our audit, and, accordingly, we do not express such an opinion.
The results of our tests of compliance with the laws and regulations described in the preceding
paragraph of this report, exclusive of the Federal Financial Management Improvement Act
(FFMIA), disclosed no instances of noncompliance that are required to be reported herein under
Government Auditing Standards.
Additionally, as a bureau within the U.S. Department of the Treasury, the OCC reported two
instances in which its financial management systems did not substantially comply with FFMIA in
its fiscal year 2000 annual assurance statement submitted to Treasury. These instances of
substantial noncompliance are related to:
* Federal financial management systems requirements, and
* The United States Government Standard General Ledger at the transaction level.
KPMG LLP KPMG LLP a U.S. limited liability partnership, i<
a member of KPMG International, a Swiss association.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 117
The OCC is scheduled to implement a new financial management system on October 1, 2001. The
OCC’s management expects the implementation of the new system to eliminate the foregoing
instances of substantial noncompliance.
We also noted other matters involving compliance with laws and regulations that, under
Government Auditing Standards, are not required to be included in this report, but that we have
reported to the management of the OCC in a separate letter dated March 30,2001.
This report is intended solely for the information and use of the OCC’s management, the U.S.
Department of Treasury Office of Inspector General, OMB, and Congress, and is not intended to be
and should not be used by anyone other than these specified parties.
LCP
March 30,2001
118 Quarterly J ournal, Vol. 20, No. 2, J une 2001
III. Financial Statements
Office of the Comptroller of the Currency
Balance Sheet
December 31, 2000
Assets
Intra-governmental
Fund Balance with Treasury
Investments and Related Interest (Note 3)
Advances and Prepayments
Total Intra-governmental
With the Public
Cash
Accounts Receivable, Net
Property and Equipment, Net (Note 4)
Advances and Prepayments
Total With the Public
Total Assets
Liabilities
Intra-governmental
Accounts Payable
Total Intra-governmental
With the Public
Accounts Payable
Accrued Payroll and Benefits (Note 7)
Accrued Annual Leave
Post-Retirement Benefits (Note 7)
Total With the Public
Total Liabilities
Net Position
Total Net Position (Note 6)
Total Liabilities and Net Position
$ 2,260,404
236,332,424
610,154
239,202,982
26,092
40,354
29,016,595
1,651,496
30,734,537
$ 269,937,519
$ 1,561
1,561
13,276,851
14,335,152
18,709,587
6,963,586
53,285,176
53,286,737
216,650,782
$ 269,937,519
The accompanying notes are an integral part of these financial statements
Quarterly J ournal, Vol. 20, No. 2, J une 2001 119
Office of the Comptroller of the Currency
Statement of Net Cost
For the Year Ended December 31, 2000
Net Cost to Regulate and Supervise National Banks
Program Cost
Intra-governmental
With the Public
Total Program Cost
Less: Earned Revenues
Net Cost of Operations
$ 54,049,568
337,897,970
391,947,538
(403,562,470)
$ (11,614,932)
The accompanying notes are an integral part of these financial statements
120 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Office of the Comptroller of the Currency
Statement of Changes in Net Position
For the Year Ended December 31, 2000
Net Cost of Operations
Financing Source
Imputed Financing
Net Results of Operations
Net Position, Beginning of Year
Net Position, End of Year
$ 11 , 614,932
15 , 074,030
26 , 688,962
189 , 961,820
$ 216 , 650,782
The accompanying notes are an integral part of these financial statements
Quarterly J ournal, Vol. 20, No. 2, J une 2001 121
Office of the Comptroller of the Currency
Statement of Budgetary Resources
For the Year Ended December 31, 2000
Budgetary Resources
Unobligated Balance, Beginning of Period
Spending Authority from Offsetting Collections
Total Budgetary Resources
Status of Budgetary Resources
Obligations Incurred
Unobligated Balance Available
Total Status of Budgetary Resources
Outlays
Obligations Incurred
Less: Spending Authority from Offsetting Collections
Obligated Balance, Net, Beginning of Year
Less: Obligated Balance, Net, End of Year
Net Outlays in Excess of Collections
$ 158 , 895,063
403 , 661,502
$ 562 , 556,565
$ 388 , 526,505
174 , 030,060
$ 562 , 556,565
$ 388 , 526,505
( 403 , 661 , 502 )
50 , 142,758
( 61 , 472 , 926 )
$ ( 26 , 465 , 165 )
The accompanying notes are an integral part of these financial statements
122
Quarterly J ournal, Vol. 20, No. 2, J une 2001
Office of the Comptroller of the Currency
Statement of Financing
For the Year Ended December 31, 2000
Obligations and Nonbudgetary Resources
Obligations Incurred
Less: Spending Authority from Offsetting Collections
Financing Source—Inputed Financing
Total Obligations as Adjusted and Nonbudgetary Resources
Resources That Do Not Fund Net Cost of Operations
Change in Amount of Goods, Services and
Benefits Ordered But Not Yet Received
Change in Accounts Receivable
Costs Capitalized on the Balance Sheet
Total Resources That Do Not Fund Net Cost of Operations
Costs That Do Not Require Resources
Depreciation and Amortization
Net Cost of Operations
$ 388 , 526,505
( 403 , 661 , 502 )
15 , 074,030
( 60 , 967 )
( 9 , 495 , 023 )
310,815
( 6 , 081 , 245 )
( 15 , 265 , 453 )
3 , 711,488
$ ( 11 , 614 , 932 )
The accompanying notes are an integral part of these financial statements
Quarterly J ournal, Vol. 20, No. 2, J une 2001 123
Office of the Comptroller of the Currency
Notes to the Financial Statements
As of December 31, 2000
Note 1—Organization
The Office of the Comptroller of the Currency (OCC) was
created as a bureau within the U.S. Department of the
Treasury (the Department) by act of Congress in 1863.
The OCC was created for the purpose of establishing and
regulating a system of federally chartered national banks.
The National Currency Act of 1863, rewritten and reen¬
acted as the National Bank Act of 1864, authorized the
OCC to supervise national banks and to regulate the lend¬
ing and investment activities of these federally chartered
institutions.
The revenue of the OCC is derived primarily from assess¬
ments and fees paid by the national banks and income on
investments in U.S. government securities. The OCC does
not receive Congressional appropriations to fund any of its
operations.
By federal statute at 12 USC § 481, the OCC's funds are
maintained in a U.S. government trust revolving fund. The
funds remain available to cover the annual costs of OCC
operations in accordance with policies established by the
Comptroller of the Currency.
The OCC collects Civil Monetary Penalties (CMP) due to
the Federal government that are assessed through court
enforced legal actions against a National Bank and/or its
officers. CMP collections transferred to the Department's
General Fund amounted to $468,976 during 2000. Current
outstanding CMP amount to $739,673.
Departmental Offices (DO), another entity of the Depart¬
ment, provides certain administrative services to the OCC.
The OCC pays the Department for services rendered pur¬
suant to established interagency agreements. Administra¬
tive services provided by DO totaled $1,965,260 for the
year ended December 31, 2000.
Note 2—Significant Accounting Policies
Basis of Accounting
The accounting policies of the OCC conform to account¬
ing principles generally accepted in the United States of
America for Federal reporting entities (GAAP). Accord¬
ingly, the financial statements are presented on the ac¬
crual basis of accounting. Under the accrual method,
revenues are recognized when earned and expenses are
recognized when a liability is incurred, without regard to
cash receipt or payment.
Fund Balance with Treasury
Cash receipts and disbursements are processed primarily
by the U.S. Treasury. The funds are maintained in a U.S.
government trust revolving fund and are available to pay
entity current liabilities.
Accounts Receivable
Accounts receivable represent monies owed to the OCC
for services or goods provided. At year-end accounts re¬
ceivable amounted to $156,729 less an allowance for
doubtful accounts of $116,375.
Advances and Prepayments
Advances and prepayments to other government agen¬
cies represent advance payment to the DO for services
and goods not yet received. Advances and prepayments
to the public represent rent and insurance paid in ad¬
vance.
Liabilities
Liabilities represent the amount of monies that are likely to
be paid by the OCC as the result of a transaction or event
that has already occurred. Liabilities represent the
amounts owing or accruing under contractual or other ar¬
rangements governing the transactions, including operat¬
ing expenses incurred but not yet paid. Payments are
made in a timely manner in accordance with the Prompt
Payment Act. Interest penalties are paid when payments
are late. Discounts are taken when cost effective and the
invoice is paid by the discount date.
Annual, Sick, and Other Leave
Annual leave is accrued as earned, and the accrual is
reduced as leave is taken or paid. Each year, the balance
124 Quarterly J ournal, Vol. 20, No. 2, J une 2001
in the accrued annual leave account is adjusted to reflect
current pay rates. Sick leave and other types of leave are
expended as taken.
Use of Estimates
The preparation of financial statements, in accordance
with GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and li¬
abilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these es¬
timates.
crued on investments. The OCC plans to hold these
investments to maturity. Discounts are amortized over
the term of the investment using the straight-line method,
which approximates the effective yield method. The
fair market value of investment securities amounted
to $238,832,500 at December 31, 2000. Investments
and related interest as of December 31, 2000, are as
follows:
Cost $ 235,926,000
Unamortized Discount (353,842)
Net Amortized Value 235,572,158
Interest Receivable 760,266
Investments and Related Interest $ 236,332,424
Note 3—Investments and Related
Interest
Investments and related interest are U.S. Government se¬
curities stated at amortized cost and related interest ac-
Maturity
Overnight
During 2001
During 2002
During 2006
Par Value
$100,926,000
$ 30,000,000
$ 80,000,000
$ 25,000,000
Interest Rate
5.990%
5.875%
5.750%
6.875%
Note 4—Property and Equipment, Net
Property and equipment purchased with a cost greater than or equal to the thresholds below and useful lives of two years
or more are capitalized at cost and depreciated or amortized, as applicable.
Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the related leases or their
estimated useful lives. All other property and equipment are depreciated or amortized, as applicable, on a straight-line
basis over their estimated useful lives. The following table summarizes property and equipment balances as of December
31, 2000.
Class of Asset
Capitalization
Threshold* Life
Cost
Accumulated
Depreciation
Net Book
Value
Leasehold Improvements
$ 50,000
5-20
$ 30,848,817
$ 19,149,097
$ 11,699,720
ADP Software
$ 50,000
5-10
2,021,763
2,020,938
825
Equipment
$ 50,000
3-10
11,950,010
7,954,865
3,995,145
Furniture and Fixtures
$ 50,000
5-10
1,672,111
1,132,977
539,134
Internal Use Software
Total
$500,000
5
12,781,771
$ 59,274,472
$ 30,257,877
12,781,771
$ 29,016,595
* Bulk Purchase Threshold is $250,000
Quarterly J ournal, Vol. 20, No. 2, J une 2001 125
Note 5—Leases
The OCC leases office space for headquarters operations
in Washington, D.C., and for the district and field opera¬
tions throughout the United States. The lease agreements
expire at various dates through 2008. These leases are
treated as operating leases. Future lease payments are as
follows:
_ Year _
2001
2002
2003
2004
2005
2006 and beyond
Total
Note 6—Net Position
Amount
$ 23,178,464
21,375,838
19,088,042
15,685,159
14,174,336
6,293,098
$ 99,794,937
The OCC sets aside a portion of its Net Position as Spe¬
cial and Contingency Reserves to be used at the discre¬
tion of the Comptroller.
The Special Reserve supplements revenue from assess¬
ments and other sources that are made available to fund
the OCC's annual budget. The Special Reserve serves to
reduce the impact on operations of unforecasted revenue
shortfalls or unbudgeted and unanticipated requirements
or opportunities.
curity. For employees covered by CSRS, the OCC contrib¬
utes 8.51 percent of their gross pay to the plan. For
employees covered by FERS, the OCC contributes 10.7
percent of their gross pay. The OCC contributions totaled
$19,930,333 in 2000.
The OCC does not report in its financial statements infor¬
mation pertaining to the retirement plans covering its em¬
ployees. Reporting amounts such as plan assets,
accumulated plan benefits, or unfunded liabilities, if any,
are the responsibility of the Office of Personnel Manage¬
ment (OPM).
Other Benefits
The OCC employees are eligible to participate in the Fed¬
eral Thrift Savings Plan (TSP). For those employees under
FERS, a TSP account is automatically established, and
the OCC contributes a mandatory 1 percent of basic pay
to this account. In addition, the OCC matches employee
contributions up to an additional 4 percent of pay, for a
maximum OCC contribution amounting to 5 percent of
pay. Employees under CSRS may participate in the TSP,
but do not receive the OCC automatic (1 percent) and
matching contributions. The OCC contributions for the
TSP totaled $5,034,632 in 2000. The OCC also contrib¬
utes for Social Security and Medicare benefits for all eli¬
gible employees.
The Contingency Reserve supports OCC’s ability to ac¬
complish its mission in the case of unforeseeable but rare
events. Unforeseeable but rare events are beyond the
control of the OCC such as a major change in the Na¬
tional Bank System or a disaster such as a fire, flood, or
significant impairment of its information technology sys¬
tems. Net Position availability as of December 31,2000, is
as follows:
Contingency Reserve
Special Reserve
Available to Cover Consumption of Assets
Available to Cover Undelivered Orders
Net Position
$ 159,030,060
15,000,000
31,530,383
11,090,339
$ 216,650,782
Note 7—Retirement Plans and Other
Benefits
Employees can elect to contribute up to 10 percent of
their adjusted base salary in the OCC 401 (K) Plan, sub¬
ject to Internal Revenue regulations. Prudential Securities
Incorporated currently administers the plan. The OCC
contributes 1 per cent of adjusted base salary to the OCC
401 (K) Plan accounts of participating employees. Ap¬
proximately 2,300 employees are enrolled in the plan; the
OCC 1 per cent matching contribution amounted to
$869,707 during 2000.
The OCC sponsors a life insurance benefit plan for cur¬
rent and former employees. This plan is a defined benefit
plan. Premium payments made during 2000 totaled
$117,460. The following shows the accrued post¬
retirement benefit cost for this plan at December 31,2000,
and the net periodic post-retirement benefit cost for 2000:
Retirement
The OCC employees are eligible to participate in one of
two retirement plans. Employees hired prior to January 1,
1984 are covered by the Civil Service Retirement System
(CSRS) unless they elected to join the Federal Employees
Retirement System (FERS) and Social Security during the
election period. Employees hired after December 31,
1983, are automatically covered by FERS and Social Se¬
Accumulated Post-Retirement Benefit Obligation
$ (6,736,388)
Unrecognized Transition Obligation
2,074,056
Unrecognized Net Gain
(2,301,254)
Accrued Post-Retirement Benefits
$ (6,963,586)
Service Cost
$ 269,441
Interest cost
488,270
Amortization of Gain
(135,072)
Amortization of Transition Obligation
172,837
Net Periodic Post-Retirement Benefit Cost
$ 795,476
126 Quarterly J ournal, Vol. 20, No. 2, J une 2001
The weighted-average discount rate used in determining
the accumulated post-retirement benefit obligation was
7.5 percent. Gains or losses due to changes in actuarial
assumptions are amortized over the service life of the
plan.
Employees and retirees of the OCC are eligible to partici¬
pate in the Federal Employees Health Benefits (FEHB)
plans and Federal Employees Group Life Insurance
(FEGLI) plan, which are cost sharing employee benefit
plans administered by the OPM. The OCC contributions
for active employees who participate in the FEHB plans
were $9,591,175 for 2000. The OCC contributions for ac¬
tive employees who participate in the FEGLI plan were
$175,039 for 2000.
The Federal Employees’ Compensation Act (FECA) pro¬
vides income and medical cost protection to covered fed¬
eral civilian employees injured on the job, employees who
have incurred a work-related occupational disease, and
beneficiaries of employees whose death is attributable to
a job-related injury or occupational disease. Claims in¬
curred for benefits for OCC employees under FECA are
administered by the Department of Labor (DOL) and later
billed to the OCC. The OCC accrued $4,140,400 of work¬
ers’ compensation costs as of December 31, 2000. This
amount includes unpaid costs and an actuarial estimated
liability for unbilled costs incurred as of year-end calcu¬
lated by DOL.
Quarterly J ournal, Vol. 20, No. 2, J une 2001 127
Index
Affiliated mergers:
For quarter, 71
Affiliated mergers—thrift:
For quarter, 84
Assets, liabilities, and capital accounts of national banks
(financial table), 91
Assets of national banks by asset size (financial table), 94
Assets, total, of national banks by state and asset size
(financial table), 103
Chief Financial Officer’s Annual Report—2000, 105
Commercial banks:
Condition and performance of, 1
Number of commercial banks by state, 102
Off-balance-sheet items, 97
Past-due and nonaccrual loans and leases, 95
Quarterly income and expenses, 98
Quarterly net loan and lease losses, 100
Total assets, 94
Total assets by state, 103
Total liabilities, 96
Year-to-date income and expenses, 99
Year-to-date net loan and lease losses, 101
Condition and performance of commercial banks, 1
Congressional testimony, speeches and, 23
Corporate decisions, recent, 21
Decisions, recent corporate, 21
Financial performance of national banks, tables on the, 89
Hawke, John D., Jr., Comptroller of the Currency:
Biography, inside front cover
Speeches and congressional testimony, 23
Interpretations,
Interpretive letters:
Interpretive Letter No. 900, Participation in lotteries by
national banks, 55
Interpretive Letter No. 901, Retention of shares of com¬
mon stock, 55
Interpretive Letter No. 902, Missouri loan production
offices, 56
Interpretive Letter No. 903, Debt suspension products
for credit card members, 58
Interpretive Letter No. 904, Proposal to engage in
finder activity, 61
Interpretive Letter No. 905, Retention of stock con¬
verted from mutual life insurance policy, 62
Interpretive Letter No. 906, Preemption of state or local
law prohibiting national bank ATM access fees, 63
Key indicators, FDIC-insured commercial banks (condition
tables):
Annual 1997-2000, year-to-date through quarter, 12
By asset size, 14
By region, 16
Key indicators, FDIC-insured national banks (condition
tables):
Annual 1997-2000, year-to-date through quarter, 6
By asset size, 8
By region, 10
Liabilities of national banks by asset size (financial table),
96
Loan performance, FDIC-insured commercial banks (con¬
dition tables):
Annual 1997-2000, year-to-date through quarter, 13
By asset size, 15
By region, 17
Loan performance, FDIC-insured national banks (condi¬
tion tables):
Annual 1997-2000, year-to-date through quarter, 7
By asset size, 9
By region, 11
Mergers:
Affiliated, (involving affiliated operating banks), for
quarter, 86
Affiliated, —thrift (involving affiliated national banks
and savings and loan associations), for quarter,
88
Nonaffiliated, (involving two or more nonaffiliated op¬
erating banks), for quarter, 71
Nonaffiliated, —thrift (involving nonaffiliated national
banks and savings and loan associations), for
quarter, 84
Nonaffiliated mergers:
For quarter, 71
Nonaffiliated mergers—thrift:
For quarter, 84
Number of national banks by state and asset size (finan¬
cial table), 102
Off-balance-sheet items of national banks by asset size
(financial table), 97
Quarterly J ournal, Vol. 20, No. 2, J une 2001 129
Office of the Comptroller of the Currency:
Interpretations, 53
Speeches and congressional testimony, 23
Past-due and nonaccrual loans and leases of national
banks by asset size (financial table), 95
Quarterly income and expenses of national banks by as¬
set size (financial table), 98
Quarterly income and expenses of national banks (finan¬
cial table), 92
Quarterly net loan and lease losses of national banks by
asset size (financial table), 100
Recent corporate decisions, 21
Speeches and congressional testimony:
Of John D. Hawke Jr., Comptroller of the Currency:
On Internet banking, 25, 28, 35
On community development bankers, 32
On electronic transfer accounts for the unbanked,
39
On risk management, 42
Of Julie L. Williams, First Senior Deputy Comptroller
and Chief Counsel:
On coordination and information sharing among fi¬
nancial institution regulators, 45
Tables on the financial performance of national banks, 89
Testimony, congressional, speeches and, 23
Total assets of national banks by state and asset size
(financial table), 103
Williams, Julie L.:
Testimony, 45
Year-to-date income and expenses of national banks by
asset size (financial table), 99
Year-to-date income and expenses of national banks (fi¬
nancial table), 93
Year-to-date net loan and lease losses of national banks
by asset size (financial table), 101
12 USC 24(7) (interpretive letters), 55, 58, 61, 62
12 USC 25a(a) (interpretive letter), 55
12 USC 36J (interpretive letter), 56
130 Quarterly J ournal, Vol. 20, No. 2, J une 2001
Northeastern District
New York District Office
1114 Avenue of the Americas
Suite 3900
New York, NY 10036-7780
Southwestern District
Dallas District Office
1600 Lincoln Plaza, Suite 1600
500 North Akard Street
Dallas, TX 75201-3394
Central District
Chicago District Office
One Financial Place, Suite 2700
440 South LaSalle Street
Chicago, IL 60605-1073
(212) 819-9860
(214) 720-0656
(312) 360-8800
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Southeastern District Western District
Kansas City District Office
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(816) 556-1800
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Marquis One Tower, Suite 600
245 Peachtree Center Ave., NE
Atlanta, GA 30303-1223
(404) 659-8855
Headquarters
Washington Office
250 E Street, SW
Washington, DC 20219-0001
(202) 874-5000
San Francisco District Office
50 Fremont Street
Suite 3900
San Francisco, CA 94105-2292
(415) 545-5900
For more information on the Office of the Comptroller of the Currency, contact:
OCC Public Information Room, Communications Division, Washington, DC 20219
fax (202) 874^t448****e-mail Kevin.Satterfield@Dcc.treas.gov
See the Quarterly Journal on the World Wide Web at http://www.occ.treas.gov/qj/qj.htm
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